A reader of blog recently asked me the following question:

“Is there a way to tell when the initial selling pressure has ceased by looking at volume or something? How long does it typically take?”

This is a great question, and I apologize that it took me so long to answer. At the heart of the question is the premise that oftentimes, there is indiscriminate selling pressure during the first couple days and sometimes weeks after a spinoff begins regular-way trading. Therein lies the opportunity.

Seth Klarman of the Baupost Group explains why this dynamic exists in Margin of Safety:

“Many parent-company shareholdings receiving shares in a spinoff choose to sell quickly, often for the same reasons that the parent company divested itself of the subsidiary in the first place. Shareholders receiving the spinoff shares will find still other reasons to sell: they may know little or nothing about the business that was spun off and find it easier to sell than to learn; large institutional investors may deem the newly created entity too small to bother with; and index funds will sell regardless of price if the spinoff is not a member of their assigned index.

For reasons such as these, not to mention the fact that spinoffs frequently go unnoticed by most investors, spinoff shares are likely to initially trade