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Stock Strategist

Spin-Offs Often Beat the Market

These stocks can be great investments at cheap prices.

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What do  Moody’s (MCO),  Coach (COH), and  Zimmer Holdings  (ZMH) have in common? After all, one rates bonds, one sells luxury goods, and one makes orthopedic devices. However, all three are wonderful businesses that could have been purchased for very reasonable prices for the same simple reason--all three were spun off from larger companies, and spin-offs are, in my humble opinion, one of the few major market inefficiencies still out there. (For the curious, Moody’s came out of  Dun & Bradstreet (DNB), Coach from  Sara Lee (SLE), and Zimmer from  Bristol-Myers (BMY).)

There have been some academic studies of spin-offs that validate what I’ve seen anecdotally over the past several years, which is that spin-offs typically have a better chance of outperforming the market than the average stock. Not every spin-off is the home run that these three have been--and not every spin-off is a wonderful business--but you can make plenty of money buying decent businesses at wonderful prices, even if wonderful businesses at decent prices are more your cup of tea.

Pat Dorsey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.