Why Spin-Off Stocks Consistently Outperform the Market Over Time
Who doesn’t love a good two-for-one deal?
Most people think of this as a type of sales promotion or marketing scheme retail and local grocery stores use to lure customers through the door. It ultimately gives shoppers the opportunity to buy products at a discount, and sometimes, they’re just too good of a deal to pass up.
But the closest thing we get to a “buy one, get one free” deal in the stock market is called a spinoff…
A spinoff occurs when one publicly-traded company separates one of its subsidiaries or divisions into a separate and brand-new public company. The main business then becomes the parent company of the spinoff. This way, the new company only needs to turn its attention to one section of operation.
There are many different reasons why companies decide to create a spinoff, but it usually has something to do with trying to make more money and increasing value for its shareholders.
When a stock spinoff happens, the new company’s shares are usually distributed proportionally to the parent company holders. Shareholders are offered the chance to own shares in both the spinoff and the parent company if they’d like. That means investors have the choice to decide whether they want to take part in the separation or not.
Both went on to become independent and publicly-traded companies, but for the purpose of this example, let’s backtrack about seven years and say you own $2,000 worth of shares in eBay.
Shareholders of the parent company are usually given shares of the spinoff and get to decide if they want to keep or sell them off. After examining your trading criteria, you decided that PYPL doesn’t fit it. You have the option to sell your shares in PYPL and focus only on making gains with eBay.
Keep in mind, spinoffs often tend to outperform their parent companies because in today’s world, it’s much easier to tweak or copy an existing idea than it is to build something entirely new from the ground up. After all, it wasn’t Chick-fil-A that invented the chicken. But where was the first place you could order a chicken sandwich?
In other words, spinoffs stand the chance to generate more revenue and outperform the broader market.
With the ability to outperform their parent companies, investors often find spinoffs to be a good-looking area of the market, which brings us to this week’s recommendation in AbbVie Inc. (ABBV).
AbbVie is a research-based pharmaceutical company that serves more than 30 million people worldwide. AbbVie’s main focus is on immunology, oncology, neuroscience and virology. The company has created over 30 drugs with more than 50 currently in development.
It began as a spinoff of Abbott Laboratories, which houses many popular brands we’ve loved and heard about our entire lives, such as Pedialyte and Ensure. And like its forerunner, AbbVie saw immediate success…
It netted $18.8 billion in sales in its first year!
That’s mostly due to the strength of its blockbuster drug, Humira. And unless you live under a rock or simply don’t watch television, you’ve probably seen some commercials for it. But just in case you haven’t, it’s a drug used to treat inflammatory conditions, like rheumatoid arthritis, plaque psoriasis, Crohn’s disease and ulcerative colitis. It’s AbbVie’s biggest sales generator by far, accounting for more than 50% of the company’s total annual sales.
Even though the broader market has taken some beatings this year, this drugmaker has delivered nothing short of strong performance. AbbVie reported a net revenue of nearly $56.2 billion in 2021 — that’s a 22.7% rise compared to $45.8 billion the previous year. Its shares have also taken the northbound lane, up 18-plus percent this year.
But one of the main reasons why traders and investors have been eager to scoop up this pharma giant’s shares lately is because it’s also trading at all-time highs.
Just last Friday, which ultimately turned out to be an all-around positive day for many other names, ABBV hit a new 52-week high, surpassing its previous top of $161.18 per share on March 23. If you’re one of my keen-eyed readers (and there are many of you here), then you know I routinely recommend selling puts on stock near new 52-week highs.
AbbVie is on an Income Trader Volatility (ITV) “buy” signal, which means now is one of the best times to take advantage of it by doing just that.
To minimize our risks, I’m recommending a trade that is protected by strong technical support and will be open for only a little less than a month.
Trading this way is the closest thing you can get to a “win-win” scenario when it comes to investing. And that’s why I think it’s so important for regular investors to learn how it works — especially if your primary focus is income.
Unfortunately, most investors have no clue how to do this… Even though it’s pretty straightforward and easy to learn. In order to change that, I’ve put together a special report that explains everything you need to know. Once you get started, you’ll see just how easy it is — and how you could be earning hundreds (or thousands) in extra income every single month, like clockwork. Go here to learn more now.