No. 3 - The Laverne & Shirley Trade

The Laverne & Shirley Trade a Winner as Spin-Offs Beat The Market

According to research from Birinyi Associates, one year after separating, spin-offs are usually up 22% - triple the return of the parent company. Does that mean Kraft (KFT) is a good buy on weakness after its separation from Altria (MO)?

Dylan goes to the chart from Birinyi to take a closer look at the statistics. According to the data, one month after a company is spun-off, the parent tends to outperform. But three months out, the child company starts to outperform, increasing the margin six months after the spin-off, and by the time the companies have been a part for a year, the spin-off is “on fire” relative to its parent.

But Guy Adami says that Kraft is a special case. It is an existing company that Altria just happened to own, he says, and that makes it not a pure example of a spin-off. Kraft also is laden with debt and hasn’t done anything in five years, Guy says. If it had a restructuring plan, he would like it, but right now he’s dubious.

Guy isn’t the only doubter of Kraft at the table. Both Tim Strazzini and Jeff Macke don’t believe it’s a buy right now. Tim advises that investors use caution when looking at spin-offs, as they are all different. Halliburton (HAL) recently spun off KBR Inc. (KBR) and the stock has been strong but that’s more of an indication of the strength of the oil services sector, Tim says. Lumping all spin-offs together to show a trend is an easy way to lose money. The Risk Doctor says look at each one on a case-by-case basis.

That opinion is echoed by Jeff Macke, who isn’t crazy about Kraft either. He says with spin-offs, investors need to be wary of management. These child companies going public on their own is akin to being brought out to the big leagues, and it’s a test to the management’s ability if they can stand on their own without the parent company to support them, he says. He prefers Hanesbrands (HBI), a company spun off from Sara Lee (SLE).

Questions? Comments?

Trader disclosure:
On APR 3, 2007, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders:
Bolling Owns (DIS), Gold, Silver Strazzini Owns (VZ), (YHOO)