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Investing Specialists

A Spin-off Worth Drilling Into

Despite challenging industry dynamics, this driller's valuation was tough to ignore.

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We talk about special situations regularly in our newsletter Morningstar Opportunistic Investor, and over the past several months, we have been lucky enough to be presented with a number spin-offs, a type of special situation. Spin-offs are an often-overlooked and potentially very lucrative corner of the investing world. For those unfamiliar with the topic, a spin-off is basically a piece of a larger company that is "carved off" and becomes independent. Often, these are small and hard to analyze, creating all sorts of investment opportunities.

So far this year, we have provided in-depth analysis on now publicly-traded spin-offs: Myriad Pharmaceuticals (MYRX) (see our analysis here),   CareFusion (CFN),  Mead-Johnson (MJN), and Seahawk Drilling (HAWK). In our real-money model portfolio, we currently own Myriad and Seahawk. We have also extensively previewed the impending spin-offs of AOL from  Time Warner (TWX) and MSG (Madison Square Garden) from Cablevision (CVC).

In this article, we take a look at drilling contractor Seahawk Drilling, a spin-off from  Pride International (PDE). After we wrote about Seahawk in Opportunistic Investor this summer, we subsequently purchased the stock for about $24.25 per share. The stock now trades over $34 per share, which is still in the lower half of our valuation range. Although Seahawk is no Cinderella, it emerged with a valuation that was hard to ignore. In fact, it initially got even cheaper, and investors who were prepared were able to capitalize on the situation.

Justin Perucki has a position in the following securities mentioned above: MYRX. Find out about Morningstar’s editorial policies.