The Next Big Profit Opportunity Is Companies Getting Smaller

Joseph Papa was hired to turn Bausch Health Cos. Inc. (BHC) around. Instead, he is breaking it up. But he’s not crazy. He’s caught on to the fact that bigger isn’t always better.

You see, Bausch Health Cos. Inc. (BHC) and its subsidiary, Bausch + Lomb eye care, are two great companies, but together, they aren’t exactly chocolate and peanut butter.

Papa has realized that the only thing worse than no partnership at all is a bad partnership, so he’s letting Bausch + Lomb become its own $3.1 billion business.

This means that both companies will be free to focus on their own business models, their own specialized products, and their own target markets. It’s a move that’s going to create billions in new shareholder value.

And while I applaud the move, I think that there’s a better way to cash in on corporate spinoffs like this one.

That’s because Joseph Papa’s move is part of a massive trend…

Thinking Small

Bausch + Lomb may be an obscure name. But its impact has been undeniable.

This eye care firm first created Ray-Ban sunglasses for military pilots. It also was one of the first companies to mass-produce soft contact lenses and contact lens solutions.

Last year, the brand had $3.7 billion in revenue from sales of contact lenses, eye surgery devices, and the like. Most of those came from outside the U.S.

Meanwhile, the rest of Bausch Health designs, makes, and sells pharmaceuticals These include drugs for depression, psoriasis, and gastrointestinal conditions.

Those are two very different lines of business, so you can see how they could both benefit from being run separately.

In fact, that’s usually exactly what happens when a corporation spins off a division so both can be more focused.

In a JPMorgan study of all spin-offs done between 1985 and 1995, spin-offs outperformed the markets by an average of 20% in their first 18 months.

According to Wall Street analyst Chip Dickson, that number more than doubled a decade later.

He looked at all spin-offs done between 2000 and 2005 and found that they outperformed the markets by an average of 45% in their first two years.

And a study by researchers at Purdue University and Peking University in Shenzhen shows similar results from 2001 to 2013.

Leaner Businesses

The reasons are simple.

A spin-off gives management and shareholders more transparency into operations and stops management from having to weigh the interests of the subsidiary against the interests of the larger company.

That makes for a more competitive, lean, and focused business. Not to mention higher returns for shareholders.

So, it’s no surprise we’ve already seen some of Bausch Health’s competitors start spinning off non-core divisions.

In February, Merck & Co. Inc. (MRKannounced it was spinning off its $6.5 billion women’s health and legacy drugs business. Novartis AG (NVSspun off its eye-care division, Alcon AG, last year.

Currently, at least 17 more spin-offs are on the books for this year and the next. These range across several industries.

For example, analytics firm Verint Systems Inc. (VRNT) is set to spin off its cyber intelligence division. Oil giant Marathon Petroleum Corp. (MPC) is scheduled to make its Speedway retail stores an independent company in the third quarter of this year.

With the COVID downturn, efficiency is now more important than ever. Shareholders have little patience left for “tag-along” businesses.

That means the trend of spinning-off companies will only increase, giving you more opportunities to benefit.

Blazing a Wide New Trail

I believe the best way to profit from spin-offs as they happen is the Invesco S&P Spin-Off ETF (CSD). This fund has just one goal: invest in companies that have been spun off within the past four years.

It takes all the hassle out of tracking when spin-offs will happen, how to buy them, and what the terms will be.

Let me be clear. This is not strictly speaking a tech-centric fund. But many of its holders are related to the life sciences or adopting new tech systems to transform their operations.

For instance, CSD’s third-largest holding is Otis Worldwide Corp. (OTIS). Chances are you’ve seen the company’s badges in high-rises and airports. Otis is the world’s largest manufacturer of elevators, moving walkways, and escalators.

In fact, Otis invented the “safety elevator” which automatically locks into place should the main cable fail. This is now the global standard.

Another CSD holding is Carrier Global Corp. (CARR), the company behind the modern air conditioner. Carrier and Otis were both spun off from United Technologies in April when United Technologies merged with Raytheon to become Raytheon Technologies Corp. (RTX).

Since that split, Carrier’s shares are up by more than 142%.

Then there’s Corteva Inc. (CTVA)DuPont de Nemours Inc.’s (DDagricultural division until it was spun off in June of last year. Corteva is now the largest agricultural company in the world. It makes pesticides, herbicides, engineered crops, and digital solutions to help optimize farm yields.

CSD’s other stocks range from Lamb Weston Holdings Inc. (LW), one of the world’s largest makers of frozen potato foods, to Penn National Gaming Inc. (PENN), a casino, race betting, and online wagering company.

What these varied stocks all have in common is that they are recent spin-offs, and so are set to outperform the markets.

It’s what makes the Invesco S&P Spin-Off ETF such a great way to play the field – and crush the market.

Even in this volatile year, this ETF is up over 89% since it rebounded on March 18.

With many more spin-offs on the horizon set to keep outperforming, 89% is just the beginning.

Cheers and good investing.

Disclosure: None.

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