Do Spin-offs Usually Live up to the Hype?

Historically, companies that have been spun off from larger parent companies have had strong returns. BusinessWeek reports that from 1990 to 2005, spin-offs beat the S&P 500 by 18% on average in their first 2 years and an index of spun-off companies beat the S&P 500 by almost 11% over the previous 5 years.

But don't rush out and buy just any spin-off stock. Investors should research their spin-off choice by taking a look at why the company is being spun off, if any executives from the larger company will be joining the new company, and what kind of fanfare is being used to promote the new company. The timing of the buy is important. Don't jump on the new stock right away because spin-offs generally trade down in their first few weeks and months. It's best to wait until the initial selling subsides. A few spin-offs to keep an eye out for include Tyco International's plan to split into three parts, American Standard's selling of their Wabco unit, Temple-Inland's restructuring, and Morgan Stanley's plan to spin off Discover Financial Services