The Hidden Goldmine of Stock Spinoffs with Rich Howe

19:39Rich Howe:Of course. Yeah. No. So if you read Joel Greenblatt's book, he's a big proponent of having very concentrated positions. So like 10 % or 20 % of your portfolio in any individual idea. And then if you read Warren Buffett and Charlie Munger, a lot of their early partnership investing were just these massively concentrated positions. And so that really resonated with me when I read all that. And I just thought, hey, why are you really going to add? How much value are you going to add adding your 11th best idea? Why not just stick with your top five ideas or your top six ideas or your top 10 ideas for that matter?

20:16Rich Howe:But what I've realized over time is that there is a real benefit to having diversification. if a position size is so massive, like for instance, I'm much more concentrated than most investors. Like I'm very happy, very comfortable having like a 10 % initial position size and a name that I think has a lot of, that I have high conviction in. But if it runs, if it becomes 20 % of your portfolio, that's when it becomes, I'm not sleeping well at night. I'm thinking about it all the time. And so right now, I think I have close to maybe 17 or 18 positions. So like, I think I have about eight, you know, I probably wouldn't have over 20 positions, but I'm happy now having, um, instead of, you know, getting, I think Thangela was like 20 or 20 % position for me, which really helped.

21:08Rich Howe:But then it became, you know, so big that I just, it became counterproductive. Um, whereas Western Digital started as a 10 % position, but then I've trimmed it. I think I've cut it in half a couple times. And it's still a meaningful position for me. But that's how I'm thinking about it. And then if I have a situation where I'm investing in a company, there's a company called Airtaw Africa, which I invested in a couple of years ago. And it looked really cheap. They're one of the leading telecom providers in Africa. They provide mobile cell phone service and mobile money solutions. And the demographics for Africa are great, growing population, young population spending more money, consuming more data, doing more transactions online.

21:51Rich Howe:And so the fundamentals all looked really good, but it's Africa, right? Like, what do I know about Africa? What am I missing? Like, you could have a massive currency devaluation. You could have a government come in and take over and rule of law might not really apply. And so with that one, I had more of like a 5 % initial position size. And that stock didn't really do that much for a couple of years. But in the past year or two, it's really started to perform well. And so I think those smaller position size, and maybe 5 % is a massive position size for others. I think it's all very personal. But for me, I'm okay.

22:29Rich Howe:If I have a 5 % or 4 % position and it really doesn't do much, it lets me, I'm able to have a little bit more patience with it. But if I have a bigger position size, then I'm like, why isn't this working? And I kind of overthink it. So that's my latest thinking in terms of position sizes, but I'm sure it'll continue to change over time.

22:50Andrew:No, yeah, that's super helpful. And interesting to always hear, I like the way you say, it really depends on you because everybody's risk tolerance is different, research process is different, and that should play out in different kind of position sizes and portfolio strategies. So speaking of research, how do you do research with spinoffs? A lot of times on the show, we talk about reading a 10K or reading the cues or things like that. So how do you do that with spinoffs?

23:22Rich Howe:I read 10Ks, I read 10Qs, I use ChatGPT, which we can talk about. I listen to earnings calls, listen to analyst presentations. The one difference is that anytime a company is going to do a spinoff, it will file what's called a form 10 information statement. And so the information statement is kind of like an S1 for a company that's going to go public. It'll talk about the historic financials, historic revenue trends, historic margins, historic earnings, the business strategy, the competition, the risks. And so that is a really great document to read, and not many people read it. Because you can get really good insights into whether this is an attractive company, whether the revenue trends and earnings trends are heading in the wrong directions, whether this company is going to pay a dividend or not, or whether it's interested in buying back stock, what the ownership structure is going to look like, how much management owns of the stock.

24:18Rich Howe:So that's the one thing that is a little bit different in terms of looking at spinoff stocks. But in terms of how I like to do my research, so I like to do, I do deep dives on all the upcoming spinoffs that are happening, just so I can have my work done ahead of time to determine whether or not it's an idea that I would want to recommend and buy. But usually it's kind of like an iterative process. Like, I don't know how you do your research, but I basically, you know, kind of have a template that I like to fill out and I will, you know, use ChatGPD to help me dig deep into the business and learn some of the business nuances that I maybe don't really appreciate, you know, just being a generalist and then try to get a sense around, you know, valuation and what are reasonable, comparable companies that I can compare it to and just get a sense of where I think this thing should trade.

25:11Rich Howe:But yeah, I'd say I use probably most of the same resources that most other investors do. One thing that I find helpful is listening to earnings calls or replays of earnings calls or replays of analyst days as I'm walking. For some reason, that just helps me. If I'm in front of the computer, listen to an earnings call, I get distracted. but I find that if I'm walking, that really helps me to really pay attention and listen to, and then I can jot down notes in my phone as I'm walking. But yeah, I don't think it's probably, my process probably isn't all that much different from other investors who are trying to get up to speed on a new stock.

25:46Andrew:Let's talk about ChatGPT then, because that's something I think everybody's trying to figure out how to best utilize. You mentioned having it check for discrepancies maybe, or you used a different word, but things that are specific to the business you're looking at, what are some other ways you prompt the AI to help you?

26:07Rich Howe:Yeah, and I'd be curious to hear how you use it too. But basically what I do, whenever I have a new spinoff coming, I have a prompt that is something like, hey, ChatGPT, and I pay for the premium version. It's like$20 a month, not the$200 a month version. I should probably test out the$200 a month and see if it's any better. But I have a prompt that I say, hey, ChatGPT, it's something like, you know, pretend you're a by-side analyst, you know, writing a report for an institutional portfolio manager. Write a deep dive on the upcoming spinoff of, you know, for instance, Comcast, which spun off its legacy linear media company.

26:49Rich Howe:And specifically focus on, and this will change depending on the spinoff, but like, you know, what are the best comparable companies to use for this spin-off? What is Remainco worth? What are the headwinds? What are the key risks that this business is going to face? What's the earnings outlook for this business? Is the business cyclical? What are the key risks? Some like that. And then I'll say, use the internet, but also use the documents that I'll upload. And it lets you upload like 10 documents. So I'll upload the maybe last couple 10ks, the form uh the form 10 a couple earnings calls last couple quarterly reports and then if i have access to like a sell side research note maybe i'll maybe i'll upload that as well and then you know the cool thing is that you can say and then it'll ask you a question i'll say it'll ask you like three clarifying questions you'll answer those and then it'll start doing its work and then the cool thing is you can just like it's like having an analyst you can just click out with the chat GPT and it'll just keep working while you're doing other stuff.

27:53Rich Howe:So like I like doing that. It's a really big tool for me. And then I would say it's really helpful as like a basic overview where I would say it's not particularly helpful is in terms of doing valuation work. Like if I say, hey, do some of the parts analysis of this upcoming company to determine if this spinoff is going to unlock value. It will do the sum of the parts analysis, but a lot of times the comps that it's using, the comparable companies, like if I'll dig into those and try to justify each of the comps that it's using, some of them will be reasonable, but some of them really won't be reasonable.

28:34Rich Howe:So I would say that's an area where I've seen mistakes or just it hasn't been particularly helpful in terms of doing my valuation analysis. But where it's really helpful, I think, is just kind of the dialogue where you're trying to understand a company and you say, like, what exactly does this company do? Like, what are examples of how this company's products can be used? And then you just, and then answers and then you say, well, I don't quite understand that. You know, give me another example. And so, like, I found the back and forth to be the most helpful part of it. And it just because it kind of forces you to think and to ask questions.

29:12Rich Howe:And so I guess that's been the most helpful aspect of using ChatGPT for me. But I'd be curious how you use it. I know it's kind of an evolving landscape.

29:24Andrew:Yeah, I honestly haven't been doing much stock research lately. One of my co-hosts, Dave, he's been managing the portfolio for our newsletter that my company publishes. So I've just been as easy as just buying his recommendations. But I have been using it for doing a little vibe coding and things like that. And for that purpose, it's been very fascinating to watch it work. You mentioned having it off to the side and seeing how it goes. The way it just writes lines of code after code after code, files, files, files, and builds out a whole... I don't even know all the terminology, but it's like building out the tree of all this coding files.

30:08Andrew:and I'm over here like, yeah, I think I took like one programming class in college. So this is like way going amazingly over my head. But it is cool kind of to have that always on resource, right? Like you're mentioning, it's almost like a sounding board for you. And there's a lot to be said to just, we all know how important it is to make smart decisions in our business, our investments, our finances. Getting the best for less matters. Yet how many of us have looked at our life insurance policies lately? You have to ask yourself, is your coverage enough given all the economic uncertainty? Or are you overpaying?

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31:56Andrew:ready? Would you like fresh towels? It matters where you stay. Book now at Hilton.com. Hilton for this day. Opening your mouth. Like one of the, one of the luxuries we have of having a podcast is, um, a lot of times we're teaching the audience, but then we're also teaching ourselves because there's something about having to vocalize your thoughts that makes you think deeper about things and unlocks these insights. I've heard people talk about writing as a similar thing to do that for, but it sounds like you can do it with AI too, and that you've been having success with that. That's right.

32:35Rich Howe:You can ask questions that you wouldn't feel comfortable asking somebody else because you feel like maybe you should know that. But totally agree with when you're talking or trying to teach something or write something, it just makes you understand it a lot better.

32:53Andrew:Yeah, for sure. For people out there who are, we have lots of different types of investors who might tune into the show. What type of investor do you think is spinoff investing, doing research on spinoffs? What type of investor is that suitable for?

33:13Rich Howe:For investors that are generally more value investors. So I would say that growth situations, generally a company that's doing a spinoff is not a growth company, generally speaking, that's not always the case. But I'd say most spinoffs that take place are more value oriented situations where a company is not happy with the valuation of its stock. And so it's deciding to spin off one or more segments to let Wall Street value these pure plays as independent entities and hopefully a lot higher than the market cap of the parent company pre-spinoff. So I would say it's generally more geared towards value investors.

33:56Rich Howe:Investors that like to go off the beaten path. I mean, it's kind of fun to be looking at the Form 10 document and know that really not that many people are looking at it and you can have a unique insight. And then the other thing that I think is kind of fun, at least to me, is that you can track these spinoffs and you know that selling pressure is going to come. And oftentimes when a company is selling off, like a company in my portfolio is selling off or being sold off by the market, you don't really know why, unless it's a big earnings miss where they just decrease guidance or something like that.

34:29Rich Howe:But the cool thing about spinoffs is that oftentimes a new spinoff that you know is going to be sold indiscriminately, you're just seeing it in real time being sold indiscriminately. And oftentimes, you probably know more about that company than the person who's selling it. Because the person who's selling it might be the S &P 500 index fund that the parent company is in the S &P 500, but the spinoff entity is not going to be in the S &P 500. And so that index fund manager has to sell. They don't even care whether it's a good company, a bad company, whatever, they have to sell. So it's kind of fun to be in a position where you can confidently say that you probably know more than the seller of the stock.

35:09Rich Howe:And like I said, not all spinoff opportunities are good ones. But when you can find those ones, those good businesses that are being sold off, it's a lot of fun.

35:19Andrew:Do you ever follow the Danaher spinoffs? I had bought Danaher maybe three years ago. I can't remember the exact date. I know we have listeners who have followed Danaher and probably still own Danaher. But I remember when that spinoff happened, they spun off this water company. And at the time I was looking for a new idea every month for the newsletter. So I was like, I don't really have the time to analyze this company in addition to the other work I'm doing. I'm just going to sell it and put it into Danaher because that's the company I bought anyways. So I can completely relate with that whole idea of just selling and that person not knowing much about the business compared to somebody who's fresh coming in.

36:08Andrew:Danaher, I remember being a... I mean, not that they still... They still are a serial acquirer and spinoffer. I don't know what the correct term for that would be. Do you look at serial acquirers and spinoffers like Danaher's?

36:27Rich Howe:I would first say that you were right to do what you did with the Danaher spinoffs. Generally, they haven't performed as well as Danaher's stock has performed. So that worked out for you. Oftentimes too, Danaher will sell off or spinoff entities that are just like, I would say, high quality industrials. so like um veralta was i think its latest spinoff which is it's a water and uh product quality innovation company and it's it's it's it's it's performed pretty well i think but it was trading at the time like 18 times ebitda and like that's just hard for me as like i was kind of my backgrounds in value investing even if the business is worth that much for me to pay up that much so like i prefer more cheaper situations where the stock's very cheap on an on an absolute basis.

37:20Rich Howe:So yeah, I think that one, yeah, I haven't been too active, but I know Dan Hur has been an absolutely great stock. In terms of other companies that are either serial acquirers or serial spinoff machines, there's a couple that I actually like. One is IAC, and that's a stock that has not worked well, particularly well of late, but it has spun off, I think, seven or eight different companies over time. And it's a sum of the parts story where if you add up the individual parts, it's worth a lot more than where the stock is trading. But that's always the case. Anytime you look at IEC, that's generally the case.

37:57Rich Howe:But where I have comfort is that we know it's in IEC's DNA to spin off and to realize value. So I have comfort that ultimately assets or asset value will be realized. IDT is another company that historically has spun off. This is a smaller company. I think it's like a 1.1 billion market cap or around there. Historically, it spun off about six or seven entities too. And right now it's a sum of the parts story where it has a bunch of different assets, no immediate plans to spin off some of its divisions. But I know I have confidence over time that the company will. And then I'm not as active in the serial acquire space, but I know it's been a really, you probably know a lot more about it than I do, but from what I understand the companies that are serial acquirers tend to do really well and to add value with those bolt-on acquisitions whereas the companies that make out of the blue one big splashy acquisition where it's like the first time they've done such a transformative acquisition those deals don't tend to work out but um so i know that the serial acquirer space can be a really interesting space

39:03Andrew:but i haven't i haven't spent much time on it oh yeah it makes sense one of the things i still haven't seen a tool for it yet. Maybe it'll never be built. But to be able to look at a company like Danaher and see the financials of how their spinoffs have also done. Because if you look at Danaher over the last five years and you look at their financials, you're like, what's so exciting about this business? You don't see the impact of the fact that like, oh yeah, they actually did grow revenues. You just don't see it anymore because it's spinoff in a different business.

39:39Rich Howe:You look at the stock price because sometimes it could be like a one for three distribution ratio. So it's hard to figure out the total return of some of these companies that do a lot of spinoffs. Yeah, I can totally relate to that. And if I find a tool that helps with that, I'll be sure to share it.

39:57Andrew:Yeah. Well, you do post a lot of great resources for people interested in spinoffs. Can you talk about some of the great work you do at your website?

40:07Rich Howe:Yeah, for sure. So I operate a website called stockspinoffinvesting.com. And if you go to stockspinoffinvesting.com slash blog, I have a bunch of free content that I publish, you know, interesting ideas once in a while, some of the latest spinoff news and analysis. I also have a spinoff calendar so you can see past and upcoming spinoffs and that's free as well. I'm also pretty active on Twitter at stockspinoffs with two S's on Twitter, stock spinoffs with one S was taken. So I just, I just added another S on Twitter or I guess X. And then I also have a premium newsletter. So if you go to stockspinoffinvesting.com slash premium, that's where I share, you know, my latest research and the ideas that I'm recommending and that I own.

40:56Rich Howe:So yeah, there's a lot of, a lot of stuff that I put up.

40:59Andrew:So is that like a model portfolio inside the newsletter?

41:03Rich Howe:Yeah, exactly. It's basically what I do is I come out with a weekly, I come out with a new recommendation maybe every month or so, but then I also publish deep dives on upcoming spinoffs. And then once a month, I share my portfolio, basically like the names that I own and the weightings of those to give you a sense of what my conviction levels are. Again, And like we've talked about, everybody has different risk tolerances. And so nobody should blindly follow what I'm doing. But I think it's helpful for folks to understand where my conviction levels are. And then I have a recommended list that are names that I'm recommending.

41:44Rich Howe:And I provide updates in my weekly update to those ongoing recommendations that are open. Awesome.

41:52Andrew:How long have you been running that?

41:53Rich Howe:So let's see. So, um, it's funny, just, I think eight years now. Yeah. I left, I used to work at city and I left in 20. Yeah. I, yeah, I think it's been about eight years. So, um, yeah, time flies.

42:11Andrew:Whether you, whether you like about publishing a newsletter like that.

42:15Rich Howe:So I like, like we talked about that when you're publishing something, it forces you to be really methodical about your thinking and it forces you to see holes, holes. in your thinking. And then it also, a lot of the subscribers that I publish for are really smart investors, like your audience, and they come up with good ideas or give me pushback and allow me to see mistakes that I've made or mistakes in my logic. And so I would say, I'd say that really, like it forces me to become a better investor because you have to publish everything. And then you can go back and see the mistakes that you made.

42:55Rich Howe:And you know, you're like, Oh, I can't believe I did that. But it's helpful. It's almost like having like a public journal. And then also just just the people that you get to meet and interact with, like I've gone to Berkshire Hathaway's annual meeting past couple years. And that's been, you know, really helpful. There's been a lot of subscribers there that have got to meet in person or at other kind of industry events. So yeah, I would just say, you know, the connections that it's allowed me to form has been the best part about it.

43:22Andrew:That's awesome. Yeah. I love the way the industry and just investing is kind of more going that way. This more interactive, not so much I'm here and you're there kind of thing. It sounds like you have a good relationship with your audience, your subscriber base. So that's really, really cool to hear. Well, Rich, thanks so much for joining us. The website again, stockspinoffinvesting.com. I know I highly recommend subscribing to the email newsletter. I always keep that in my inbox just in case a spinoff pops up. You just never know when a spinoff will catch your eye. And so that's always a great resource to have.

44:02Andrew:So thanks for joining us again, Rich, and being so generous with your time. That is going to wrap this up for today. You can reach out to us. If you ever have any questions at newsletter at einvestingforbeginners.com, remember to invest with a margin of safety, emphasis on the safety. Have a good one and we will talk to you next time.

44:41Andrew:e-edf.com. Until next time, have a prosperous day. The information contained is for general information and educational purposes only. It is not intended for a substitute for legal, commercial, and or financial advice from a licensed professional. Review our full disclaimer at e-investingforbeginners.com. Burnout Paradise is hailed as the wildest night out in New York City. by Time Out New York. Now off-Broadway at the Astor Place Theater, it's a live show you'll never forget as the people on stage make a desperate attempt to complete a series of escalating tasks, all while running on treadmills.

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