In this article, we discuss 10 recent spin-off companies that hedge funds are piling into. If you want to see more stocks in this selection, check out 5 Recent Spin-off Companies That Hedge Funds Are Piling Into.
A spin-off occurs when a company splits off a portion of its business into a separate company and distributes shares of the new entity tax-free to the parent company’s shareholders. The number of shares a shareholder receives is proportional to their holdings in the parent company. In 2022, while the stock market saw a decline and the market for initial public offerings cooled, the activity surrounding corporate spinoffs increased. In various industries, numerous well-known and established companies are spinning off parts of their operations to drive growth, improve returns, and increase shareholder value. Prominent blue-chip companies pursuing spinoffs include General Electric Company (NYSE:GE), Johnson & Johnson (NYSE:JNJ), and 3M Company (NYSE:MMM).
Spin-off firms typically belong to a separate industry sector compared to the parent company. The parent firm believes that the spin-off can benefit from greater strategic capital allocation, improved ROI, and a more entrepreneurial approach, as it is no longer restricted by the parent company. This allows the parent company to concentrate on its core business with faster growth, and allocate more resources towards it.
Some spin-offs occur due to activism, as activists push for change. Another factor contributing to the rise in spin-offs is social proof; as more spin-offs are announced, especially within certain industries, boards of directors and CFOs feel pressure to consider similar actions. For example, in the healthcare industry, significant pressure exists to divide the high-return biotech and pharma businesses from the lower-growth but more stable consumer healthcare operations.
Johnson & Johnson (NYSE:JNJ) recently filed a plan to separate its consumer health division, marking the first significant US IPO filing of the year. According to its filing with the SEC on January 4, the spin-off firm Kenvue Inc. will consist of J&J brands such as Tylenol, Listerine, Neutrogena, and Nicorette. The filing comes after a lackluster year for US IPOs, which saw the lowest amount raised since the financial crisis in 2009. After reaching a record high of $339 billion in 2021, the number of IPO listings on US exchanges declined to $24 billion in 2022, as per Bloomberg data. The Kenvue filing could be the major IPO event this year and if it proves successful, it could indicate that the IPO market is recovering from uncertainty, inflation, and the ongoing impact of the COVID-19 pandemic and the conflict in Ukraine. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are leading the IPO. Kenvue intends for its shares to be listed on the NYSE under the ticker symbol KVUE.
Our Methodology
We scanned Insider Monkey’s database of holdings of 920 elite hedge funds tracked as of the end of the third quarter of 2022 and picked the top 10 companies that were spun off in 2022 and were popular among smart investors. The list is arranged in ascending order of the number of hedge fund holders in each firm.
Image by Sergei Tokmakov Terms.Law from Pixabay
Recent Spin-off Companies That Hedge Funds Are Piling Into
10. Brookfield Business Corporation (NYSE:BBUC)
Number of Hedge Fund Holders: 3
On March 15, Brookfield Business Partners L.P. announced a unit split which resulted in the creation of Brookfield Business Corporation (NYSE:BBUC), which focuses on healthcare, construction, and wastewater services in the United States, Europe, Australia, the United Kingdom, Canada, and Brazil. It operates through three segments – Business Services, Infrastructure Services, and Industrials. According to Insider Monkey’s Q3 2022 data, Brookfield Business Corporation (NYSE:BBUC) was part of 3 hedge fund portfolios, compared to 6 in the prior quarter.
9. FTAI Infrastructure Inc. (NASDAQ:FIP)
Number of Hedge Fund Holders: 11
FTAI Infrastructure Inc. (NASDAQ:FIP) announced its successful spinoff from Fortress Transportation and Infrastructure Investors LLC on August 1, 2022. FTAI Infrastructure Inc. (NASDAQ:FIP) concentrates on acquiring, developing, and running infrastructure assets and businesses that serve transportation and energy sector clients. In the third quarter of 2022, the company posted a revenue of $78.56 million, up 113.6% year-over-year, beating estimates by $5.56 million. FTAI Infrastructure Inc. (NASDAQ:FIP) also renewed an existing Exxon contract at Jefferson Terminal for the shipment of refined products to Mexico for a five-year term. Additionally, the company acquired 12,000 acres in West Virginia for further development of gas reserves for Long Ridge.
On September 21, Compass Point analyst Giuliano Bologna maintained a Buy recommendation on FTAI Infrastructure Inc. (NASDAQ:FIP) but trimmed the price target from $39 to $31. The analyst updated his model and forecasts to reflect the spinoff of FTAI Infrastructure Inc. (NASDAQ:FIP), which resulted in a change in value, but still viewed Fortress Transportation’s shares as poised to perform well as the company raises usage, generates revenue from assets, and expands its aerospace services.
According to Insider Monkey’s data, 11 hedge funds were long FTAI Infrastructure Inc. (NASDAQ:FIP) at the end of the third quarter of 2022, with combined stakes worth $32.3 million.
In addition to General Electric Company (NYSE:GE), Johnson & Johnson (NYSE:JNJ), and 3M Company (NYSE:MMM), FTAI Infrastructure Inc. (NASDAQ:FIP) is one of the stocks popular among smart investors.
8. Embecta Corp. (NASDAQ:EMBC)
Number of Hedge Fund Holders: 19
Embecta Corp. (NASDAQ:EMBC) is a New Jersey-based medical device provider specializing in offering various products to improve the health and well-being of individuals with diabetes. The offerings include pen needles, syringes, safety devices, and digital tools to help manage the disease. Becton, Dickinson and Company (NYSE:BDX), a top global medical technology company, announced on April 1 that it has concluded its spinoff of Embecta Corp. (NASDAQ:EMBC), which operates BD’s former Diabetes Care segment and is now one of the biggest pure-play diabetes management companies in the world. It is one of the best spin-off stocks to invest in.
On January 6, Morgan Stanley analyst Cecilia Furlong downgraded Embecta Corp. (NASDAQ:EMBC) to Underweight from Equal Weight with a $28 price target. The analyst sees Embecta as a profitable global diabetes company with an established presence, but views it as a story of long-term execution. The T2D patch pump holds the most potential for growth in the business, but its impact is not expected until FY25, when the market is expected to be more competitive, according to the analyst.
According to Insider Monkey’s data, 19 hedge funds were long Embecta Corp. (NASDAQ:EMBC) at the end of September 2022, compared to 13 funds in the last quarter. John Petry’s Sessa Capital is the largest stakeholder of the company, with 2.5 million shares worth $73.8 million.
Here is what Madison Funds specifically said about Embecta Corp. (NASDAQ:EMBC) in its Q2 2022 investor letter:
“During the quarter, we exited Embecta Corp. (NASDAQ:EMBC) and initiated a position in Nike. We received shares in Embecta as a result of Becton Dickinson spinning-off its Diabetes Care segment. In our assessment, Embecta was fairly valued, so we decided to exit the holding.”
7. ZimVie Inc. (NASDAQ:ZIMV)
Number of Hedge Fund Holders: 20
ZimVie Inc. (NASDAQ:ZIMV) is a Colorado-based medical technology company that develops, manufactures, and commercializes a portfolio of products and solutions to treat a range of spine pathologies, support dental tooth replacement, and restoration procedures worldwide. On March 1, Zimmer Biomet Holdings, Inc. (NYSE:ZBH), a leading global medical technology firm, completed the spinoff of ZimVie Inc. (NASDAQ:ZIMV), its former dental and spine division.
On December 21, Barclays analyst Matt Miksic started coverage of ZimVie Inc. (NASDAQ:ZIMV) with an Underweight rating and a $9 price target. The stability of the dental business contrasts with the difficulties faced by the spine division, which has suffered double-digit declines in a market growing at a low single digit or remaining flat, according to the analyst. He sees no improvement in the near future. Given the large amount of cash and working capital tied to the spine business, the analyst anticipates ZimVie Inc. (NASDAQ:ZIMV)’s spine losses to persistently weigh on the overall performance of the company.
According to Insider Monkey’s data, ZimVie Inc. (NASDAQ:ZIMV) was part of 20 hedge fund portfolios at the end of Q3 2022, compared to 16 in the last quarter. ZimVie Inc. (NASDAQ:ZIMV) is one of the best spin-off stocks that hedge funds are piling into.
Ariel Investment made the following comment about ZimVie Inc. (NASDAQ:ZIMV) in its Q3 2022 investor letter:
“By comparison, shares of leading manufacturer and distributor of medical devices specializing in spine and dental products ZimVie Inc. (NASDAQ:ZIMV) sharply declined in the quarter, following a downward revision in full-year guidance. Over the long-term, we believe the foreign exchange headwinds the company is facing will soften and expect the management team to enhance its focus on research and development, as well as expand the product portfolio across its core value chain.”
6. Haleon plc (NYSE:HLN)
Number of Hedge Fund Holders: 21
Haleon plc (NYSE:HLN) provides therapeutic oral health, pain relief, respiratory health, digestive health, and other consumer health products, including vitamins, minerals, and supplements. On July 18, British pharmaceutical company GSK plc (NYSE:GSK) separated its consumer health division, Haleon plc (NYSE:HLN), in the largest European listing in over 10 years. Consequently, Haleon became the largest independent consumer health company globally, housing well-known brands such as Sensodyne toothpaste and Advil.
On January 6, Morgan Stanley analyst Rashad Kawan upgraded Haleon plc (NYSE:HLN) to Overweight from Equal Weight with a price target of 370 GBp, up from 295 GBp. The analyst thinks “reasonably-priced Staples stocks with a reliable growth proposition” should do well versus the market this year.
According to Insider Monkey’s third quarter database, 21 hedge funds were bullish on Haleon plc (NYSE:HLN), with collective stakes worth $305.3 million.
Like General Electric Company (NYSE:GE), Johnson & Johnson (NYSE:JNJ), and 3M Company (NYSE:MMM), Haleon plc (NYSE:HLN) is on the radar of elite hedge funds.
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Disclosure: None. 10 Recent Spin-off Companies That Hedge Funds Are Piling Into is originally published on Insider Monkey.