A Secret Way to Invest in Spin-Offs
By
by Ann Sosnowski
Altria Group Inc. (MO:NYSE) has finally decided to sell its shares in Kraft Foods Inc. (KFT:NYSE) and spin Kraft off as a completely separate entity.
Obviously, MO is having a rough time of it all, with tobacco sales declining and cities as well as countries banning smoking in public places, including restaurants.
The separation of both companies will allow KFT and MO to go after their own acquisition targets and focus on expanding into other areas.
Originally, the conglomerate of KFT and MO allowed Altria's cigarette business to make money on food while cigarette consumption continued to decrease. Now it forces Altria to branch out into new areas, like selling snuff and chewing tobacco, and also to stop hiding behind its food manufacturing.
Altria will spin-off its 89% stake in Kraft Foods on March 30. Current Altria stockholders will receive .70% of one share of KFT for every one share of MO stock they currently own.
In 2001, Altria had spun off the previous minority (11%) to shareholders. Since then, KFT has only risen 12.6%, “lagging its peer group” according to Michael Arndt of BusinessWeek.com.
Kraft is second only to Nestle S.A. (NSRGY:OTC) of Switzerland in the manufacturing of packaged foods. Since the beginning of 2006, KFT stock is actually up 21%, while Altria has gained 16% on its shares during the same time period.
Regardless, KFT has disappointed current investors. The company's fourth-quarter earnings were down 19% on poor sales. Kraft CEO Irene Rosenfield states simply that KFT needs to rebuild its pipeline of products in order to continue to compete globally.
Currently, KFT trades for $33.96 and MO trades for $87.34 per share.
It's possible that this spin-off can put KFT into the Claymore/ Clear Spin-Off ETF (CSD:AMEX).
This ETF's started trading on Dec. 15, 2006 and is the first one in the market to exclusively track companies that were spun off from larger corporations.
According to the press release from Claymore Securities announcing this new ETF (along with three others), spin-off companies are better able to focus on their core businesses and long-term growth and can “unlock their true market value.”
Claymore's plans are to have the CSD outperform the Russell Mid-Cap Growth Index especially.
Hypothetical growth of this ETF shows that it would have outperformed the Russell Mid-Cap Growth Index by 63% from 2000 to late November 2006.
You can very easily invest in the CSD on the AMEX, just like any other ETF. Currently, the CSD trades for $25.98 per share.
It's heavily weighted with financials, consumer discretionary and information technology companies. Current top holdings include Embarq Corp. (EQ:NYSE), which spun off from Sprint Nextel Corp. (S:NYSE) in May 2006 and Ameriprise Financial Inc. (AMP:NYSE) spun off from American Express Company (AXP:NYSE) in September 2005, one of the largest spin-off deals in history.
Since their spin-offs, EQ has gained 7.84% in share price and AMP has gained more than 66%, typical of what Claymore calls the “spin-off effect.”
You can visit Claymore's Web site for more information on this extremely interesting investment technique.