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 at depressed prices, making them of special interest to value investors. Moreover, unlike most other securities, when shares of a spinoff are being dumped on the market, it is not because the sellers know more than the buyers. In fact, it is fairly clear that they know a lot less.”


What Do Spinoff Studies Say About Initial Selling Pressure

To answer the question, I looked back at a number of studies that were conducted by investment banks and academic institutions and highlighted below the ones that discuss initial selling pressure.

Study #1: S&P Research, Capital Market Implications of Spinoffs

Date of Report: March 2017

To View Report Click <Here>

Time period that was covered: 1989 and 2015

Geography: United States

Selling Pressure Finding:

  • First five days of trading, spinoffs saw -1.37% underperformance versus their industry


Study #2: HEC Paris (Paris Business School), Investing in Spinoffs: An Academic and Empirical Analysis of Long Term Returns

Date of Report: December 2013

To View Report Click <Here>

Time Period Covered: 1992 to 2008

Geography: North America

Selling Pressure Finding:

  • Spinoffs underperformed their industry by 0.94% on average in first five days of trading.


Study #3: Credit Suisse, Do Spin-offs Create or Destroy Value?

Date of Report: September 2012

To View Report Click <Here>

Time Period Covered: 1995 through 2012, top 1000 firms by market cap

Geography: United States

Selling Pressure Finding:

  • Spinoffs bottomed on the 5th day of trading on average, underperforming the S&P 500 by 3.7% over that period.


Study #4: Citigroup, What Works in Equity Markets – Are Spin-Offs Money Spinners?

Date of Report: May 2016

Link to report is not available.

Time Period Covered: 2000 to 2016

Geography: Global

Selling Pressure Finding:

  • In the first 5 days after the effective date, spinoffs in the US, Europe, and World, underperform by -2.3%, -1.4% and -1.2%, respectively (benchmark is MSCI country in which the spinoff is domiciled).

In summary, the findings of the studies generally suggest waiting for at least five days of trading before establishing a position.


My Own Research

I also decided to look at some recent spinoffs over the past two years which experienced initial selling pressure. I wanted to focus on small and microcap spinoffs where there is normally a large difference in market value of the parent and spinoff. These spinoffs tend to be more prone to initial selling pressure. The list of spinoffs analyzed is not exhaustive by any means, but I believe its representative of initial trading of most small spinoffs.


As you can see from the data above, the spinoffs declined an average of 33% from their initial opening price. On average, it took roughly 9 days for the spinoffs to bottom and ~41% of the spinoffs’ shares outstanding traded before the shares bottomed.

How do you tell how many shares have traded? Go to finance.yahoo.com, and type in the ticker of the spinoff under consideration. Click on the “historical data” button and the site will display shares traded by day.

So the key takeaway from my analysis is its good to wait for at least 6 trading days to buy a spinoff that you suspect will be indiscriminately sold. You should also track how many of the spinoff’s shares outstanding have traded. Avoid establishing a position until at least 30% to 40% of the spinoff’s shares outstanding have traded.  There will always be exceptions to the rule, but following this advice will generally serve you well.

Do you have any other stock spinoff questions? Let me know in the comments below, and I will try to answer them in future blog posts.