I thought it might be worth sharing a recent experience with a spinoff, which perhaps highlights that they can provide some pretty good investment opportunities. The company in question is CRC (California Resources), which is a spinoff from OXY (Occidental Petroleum) from the end of November 2014.
I bought CRC on 9 January 2015, at a price of $4.96. At the time, OXY was worth $62.6b, whilst CRC was worth $2.2b. The spinoff company was, clearly, on a completely different scale than OXY. That’s a good thing! Part of what makes people dump spinoffs is that they amount to piddly little holdings. Investors should always be on the lookout for indiscriminate dumping.
At the time I bought, CRC had been trading in a historic low-high range of $4.47 – $9.71, starting out at the high end, and wending its way inexorably down to the low end. I had decided to wait until there was a 10% bounce of the bottom, which explains my entry point.
The reason for the falling share price was simple enough: oil prices were plummeting, which is the sector that CRC operates in. I was worried that oil might not have bottomed, as there were many problems in the industry. Shale oil producers can’t just cease production. There were also stories about how there were ships that were basically acting as storage vessels for oil. I also read at the time that EXPERTS EXPECT OIL PRICES TO GO LOWER.
The great irony of investing is that when experts predict something, it’s usually the time to do the exact opposite of what they’re recommending. It is amazing just how egregiously wrong experts can be. They perhaps do not consider the possibility of second-order effects and some of the natural negative feedback mechanisms that the market has.
Despite all the doom and gloom, CRC had revenues for 3 m/e 31 Mar 2014 of $1100m. At a market cap of $2.2b, it was selling at far cheaper than peers, in what was probably a depressed market anyway. That’s why I bought.
I sold out on 22 April 2015 at $8.97. The price had falled off the day before, and I figured that it wasn’t the bargain it once was. I bagged an 80% gain on this badboy for just a few months holding period. If only I could be anywhere near like as consistent with my other poxy shares. CRC is currently priced at $9.11, so maybe I sold too soon.
You can see why I like spinoffs, though.