Spinoffs Outperform S&P with GE Vernova Leading

Key Takeaway

• Spinoff stocks, like GE Vernova with a 23% rally, outshine the S&P 500's 9% increase in 2024, highlighting their market-beating potential.
• Zero-day options trading grows to $862 billion notional value in April, yet investor sentiment is split over its market impact.
• Upcoming healthcare sector spinoffs from Baxter International and Edwards Lifesciences offer new investment opportunities despite their current underperformance.

Spinoff Stocks Shine in 2024

In the current financial year, spinoff stocks have emerged as some of the market's most consistent performers. With 15 companies having completed spinoffs, including the notable split of General Electric into GE Vernova and its aviation and energy divisions, these newly independent entities have shown remarkable growth. GE Vernova, for instance, has seen its shares rally by over 23% since they began trading in late March. This performance stands out against the backdrop of the S&P 500, which has seen an almost 9% increase in 2024 but experienced a slight decline of just over 1% in the second quarter. Morgan Stanley highlights the potential for investors, noting that 19 more companies are slated to complete spinoffs this year. The firm's strategist, Todd Castagno, emphasizes the unique opportunity spinoffs present for unlocking underappreciated value, citing historical data where spinoffs outperformed the broader market by more than 2% two years post-split.

Zero-Day Options: A Divided Outlook

The trading landscape for zero-day options (0DTE), contracts that expire within 24 hours, continues to expand, with the notional value of these contracts tied to the S&P 500 reaching approximately $862 billion in April. Despite the growth, the Bloomberg Markets Live Pulse survey reveals a divided sentiment among investors, with nearly half fearing a potential market blowup due to these trades. The survey, which gathered opinions from 300 respondents, indicates a split view on the future of 0DTE trading, with some expecting steady growth while others anticipate a calamitous end. Phil Pecsok of Anacapa Advisors comments on the increasing prevalence of daily options, suggesting their continued expansion in the market. However, concerns about the impact of these trades on stock volatility and the potential for retail investors to incur losses have been raised, with a majority acknowledging the ease of losing money through 0DTE.

Upcoming Spinoffs and Market Dynamics

Looking ahead, several companies are preparing for spinoffs in the latter half of 2024, with the healthcare sector notably active. Baxter International plans to spin off its kidney care company, Vantive, while Edwards Lifesciences aims to separate its critical care unit. Additionally, Unilever is set to spin off its ice cream business in the fourth quarter. These upcoming spinoffs present new opportunities for investors, even as some parent companies, like Baxter and Edwards, have seen their shares underperform the market this year. The anticipation of these splits reflects the ongoing interest in leveraging spinoffs as a strategy for realizing potential value and enhancing shareholder returns.

Street Views

• Todd Castagno, Morgan Stanley (Neutral on spinoffs):

  "Spin-offs present investors with a unique opportunity to capitalize on unlocked and potentially underappreciated value."

• Roth MKM Analyst for GE Vernova (Bullish on GE Vernova):

  "GE Vernova is one of its current favorite spinoff stocks — which the company said to 'buy buy buy.'"

• Roth MKM Analyst for Esab (Bullish on Esab):

  "Esab completed its split from Enovis in April 2022. Roth MKM advises investors to buy the stock on pullbacks."

• Roth MKM Analyst for Sylvamo (Bullish on Sylvamo):

  "Sylvamo is another stock where investors should 'join the momentum.'"

• JC O’Hara, Chief Market Technician at Roth MKM (Bullish on Veralto):

  "Veralto... shows a 'strong young chart.' Shares have rallied almost 18% year to date."