Not all spinoff stocks are created equal.

As a group, these stocks outperform the market. Individual spinoffs can dramatically outperform the market.

But the new company could also struggle and even go bankrupt. While stock spinoff investing is somewhat popular, some 38% of stock spinoffs don’t generate shareholder value in the first year.

So before you jump in and buy just any old stock spinoff, do your research. Many traders and investors who look at this kind of play don’t bother the Form 10 filing or other company financial information.

You can do yourself a big favor — and create a big advantage — by doing in-depth research.

Just like any type of trading or investing, you can lose money if things go wrong. Here are a few things to consider as you research and plan…

#1 Pay Attention to News Catalysts

So far, this spinoff hasn’t done great. The initial stock offering of Arlo was $16 per share. The stock moved up to $22.60 in late August but has since fallen steadily.

It’s hovering in the $10 per share range during December and into 2019. While the S&P 500 is down 11.63% in that same period, Arlo has dropped 54.21%.

Like I said, there’s often downward price pressure on a new spinoff. So, is this the time to buy? A lot of analysts seem to think so. But do your own research first!

Here’s another example of a recently completed spinoff: Garrett (Nasdaq: GTX) — an automotive business specializing in turbocharger systems — from Honeywell (Nasdaq: HON).

Key Stock Spinoff Tips for Beginners

Don’t Put Your Trust in Stock Promoters

Remember, stock promoters get paid to market specific stocks. When you read a press release from a promoter, it contains all the possible positives and unicorn-level upsides to owning shares.

Don’t be fooled.

Do your research. Know your trade parameters. Stick to your plan.

I’m not saying you shouldn’t check out a stock that’s being promoted. If nothing else, it will teach you how pump and dumps work and how promoters con the average newbie.

Promoters are no different when it comes to stock spinoffs. Get on a few message boards or email lists and you’ll soon see how ‘spinoff X will make you a fortune.’

Educate yourself. Study every day (including weekends), and you’ll learn to separate the nonsense from the real news.

Don’t Trade too Big

Let’s say you do your research and you decide to play a stock spinoff.

Should you go for it and risk a huge percentage of your account?

Personally, I wouldn’t. Especially if this is a new play for you.

I have a few reasons for this …

First, stock spinoffs tend to be a little longer play. As I said before, the stock often has downward pressure in the beginning before bouncing back a few months later. Some investors only use stock spinoffs as a long-term buy-and-hold strategy.

Second, as a day trader, if I put a large percentage of my account into a stock spinoff, I could tie up money normally available to trade for a long period. This just doesn’t fit my trading strategy.

Never Stop Learning

The idea of stock spinoffs is pretty intriguing …

It can open up a whole new opportunity as a trading strategy. But you’ll need to study like crazy to be on the right side of this play most of the time.

The Bottom Line

Spinoffs can be a good place to pick up undervalued shares. That is, as long as you have the patience to wait for the separated companies to thrive on their freedom.

Before you start trading spinoff stocks, you need to evaluate your current strategy. Make sure you know where you are and where you are headed. Don’t just start trading them without first making sure spinoffs fit in your current trading strategy.

Do your research.

If you want to trade spinoffs, it’s important to know the breakdown and details of the spinoff and analyze the market trends surrounding it, then go out and get started!

A strong catalyst is one of my fundamental requirements when it comes to trading a stock. If you plan to play spinoffs, you need to understand not just the news but the cycle of news around the spinoff.

There are a few websites dedicated to spinoff news and information. StockSpinoffs.com is a good place to start. It contains a list of stock spinoffs and information such as the parent company name, the spinoff name, and the expected spinoff date.

There’s also a section on the website for recent spinoffs. Like trading penny stocks, studying history can give you good insight when it comes to trading spinoffs.

Note how the price action of the parent company’s shares is affected by the announcement of the spinoff.

As you check out the news, here are a few questions to consider:

• What’s the reason for the spinoff?
• Will the new company be assigned toxic debt —i.e., is the parent company unloading debt? This isn’t necessarily a bad thing, but it can affect the share price and future price action for both companies.
• Is the new company big enough that institutional investors will remain players? Most of the time it’s better if the institutional investors sell the subsidiary shares. This creates downward pressure on the stock price right after the spinoff.
• Is there insider incentive reported on the Form 10 filing (the form submitted to announce the spinoff)? This is found in the executive compensation section and will give you the number of reserved shares for management and employees.

#2 Use Fundamental Analysis Software

As you research spinoff trades, it’s important to understand why each stock is valued the way it is after the spinoff. It can get fairly complicated if the parent company retains shares of the new company.

Sometimes I downplay company fundamentals in my style of trading. But when it comes to spinoffs, fundamentals can be crucial — don’t overlook this.

You need to understand the valuation of the new stock (or the parent stock). It’s one of the best ways to determine the chances of the stock price going up.

By setting up screens and adding spinoff stocks to your watchlist, you’ll be better able to determine the right entry and exit points for the trade.

It’s also important to understand why spinoffs historically outperform the market by about 10% …

It’s all in the numbers. Fundamental analysis is where you get the data you need to determine fair value for a spinoff company.

#3 Follow Key Chart Patterns

I go on about patterns all the time, right?

Guess what … they matter here, too.

As you research spinoff trades, take note of chart patterns for the companies involved. While nothing is guaranteed and this isn’t an exact science, historical charts give you an idea of what to look for in upcoming spinoffs.

Also, as an active trader, you might look for contrarian chart patterns. What do I mean by that?

Check it out: Most traders do a little reading and think they know a lot about stock spinoffs. What do they know? They know that spinoffs, as an aggregate, outperform the market.

But as I mentioned earlier, nearly 40% don’t show positive returns in the first year.

How can you take advantage of that? Is it possible downward pressure on a spinoff could be a short play?

Remember, your goal is to be the winner in as many trades as possible. Look for patterns.

Examples of Recent Stock Spinoffs

Netgear (Nasdaq: NTGR) just completed a spinoff of Arlo Technologies (Nasdaq: ARLO) after 20% of the company was offered as an IPO in August.

The remaining shares of Arlo were distributed to Netgear shareholders on December 31, 2018.

Arlo manufactures wireless, smart networked devices such as security cameras and lights. They also manufacture accessories such as mounting hardware, camouflage skins, and matching doorbells.