Spin-offs with Insider Buying (December 2020)

Starting today, I will be publishing a monthly article looking at spin-offs with insider buying.

Many great investors advocate investing in stock spin-offs including Peter Lynch.

Here’s what Peter Lynch recommended in his book One Up on Wall Street:

[Spin-offs] are  a fertile area for amateur investors…….A month or two after the spinoff is completed, you can check to see if there is heavy insider buying among the new officers and directors. This will confirm that they, too, believe in the company’s prospects.

Today we will review four spin-offs with insider buying.

Baudax Bio (BXRX)

On November 23, company director, Alfred Altoari, disclosed that he purchased $5k of BXRX at an average price of $1.06.

Several other directors have bought in the open market as recently as March 2020.

Baudax Bio was a 2019 spin-off from Recro Pharma (REPH).

For years, Recro Pharma spent millions of dollars trying to get its acute care drug, ANJESO  (IV Meloxicam), approved.  The drug is finally approved and launched.

The launch is going slowly as it’s hard to market to doctors in a pandemic.

Nonetheless, analysts expect this drug to generate revenue of ~$50MM by 2020. If this is true, the company is too cheap trading at an enterprise value of ~$30MM. Typically biotechs trading at EV/Revenue multiples of 2.0x to 5.0x.

This is a speculative situation. It could be a multi bagger or it could be a zero.

Garrett Motion (GTXMQ)

In November and December there has been significant insider buying at Garrett Motion.

The company is a 2018 spin-off from Honeywell (HON) that has declared bankruptcy largely to get out of its legacy asbestos liability obligation to Honeywell.

Here is a good overview of the situation and there is also a good summary on VIC.

I’m tempted to buy the stock as I think the underlying assets have a lot of value especially given the ongoing cyclical recovery.

However, I have no experience investing in bankrupt companies and am worried I would be “the patsy at the poker table” as Buffett would say (perhaps Honeywell is buying to strengthen its position in the lawsuit?).

Nonetheless, it’s a very interesting situation that I will continue to follow.

Otis (OTIS)

On December 9, the Otis President made a modest open market buy ($33K of stock).

Otis, an elevator manufacturer and service provider, is a 2020 spin-off from United Technologies (UTX).  I think Otis has a great business but believe it is fairly valued at current levels. Here’s a deep dive that I published at the time of the spin-off.

Viatris (VTRS)

On December 16, Viatris Director, James Kilts, spent $498k buying VTRS stock in the open market at an average price of $17.66.

Viatris is Mylan’s former business which was merged with Pfizer’s (PFE) generic business. The company is expected to have pro forma 2020 revenue of $19BN to $20BN, EBITDA of $7.5BN to $8.0BN and free cash flow of >$4.0BN. On a pro forma basis, the new company is trading at 5x free cash flow and 6x EBITDA. Why is it so cheap? Mylan has high leverage and it (along with other generic manufacturers) is under investigation for price fixing. Nonetheless, it looks interesting.

Viatris will pay a dividend of at least 25% of free cash flow (25% of $4BN). At Mylan’s current price, the expected dividend yield is 4.6%. The dividend will not be initiated until Q2 2021 (guidance is first full quarter post close). I believe the dividend initiation will be a significant catalyst. Additional details are available in our Spin-off Overview document.