In a Narrow Market, Pay Attention to Spinoffs
Editor's note: Everyone knows AI is the trend that's driving today's market. But according to Joe Austin of our corporate affiliate Chaikin Analytics, some of the best opportunities lie where few investors think to check. In this issue, originally published in the free Chaikin PowerFeed daily e-letter, Joe explains one way to find hidden gems – while still getting in on AI gains...
We've seen big gains in the markets recently...
Through the end of April, the S&P 500 Index gained more than 5%. But here's the catch: most of that came from just 10 stocks.
When markets are this narrow, one stumble could take everything down. It's the downside of today's technology boom.
Now, I'm always one for caution. But worrying isn't going to make you any money. If you think the environment is frothy, one great strategy is to find assets that are likely to succeed no matter what the market does.
For that, consider spinoffs...
This is when a public company breaks off a business line and gives shareholders stock in that new company. And right now, it's a lesser-known way to get in on the bull market without as much froth...
Spinoffs are interesting because, at least initially, they tend to trade on their own fundamentals more than the market's.
There are some good reasons for this...
First, many index funds and exchange-traded funds ("ETFs") will dump a spinoff right away if it doesn't fit their mandate. This can push the price down at first, but it has nothing to do with the company itself.
Second, new companies typically have little analyst coverage... untested investor bases... and no trading history.
That uncertainty makes investors nervous. And some of them sell. But there's an upside, too...
New management teams – armed with fresh equity grants – tend to focus intensely on improving operations. That means returns are driven more by execution and less by market sentiment.
Over the years, several studies have shown the value of spinoffs...
One found that spinoffs outperformed the S&P 500 by about 10% per year in the three years after their creation.
The parent companies did well, too. According to the study, they outperformed the S&P 500 by more than 6% per year over the same three-year period.
And a study by consulting firm McKinsey showed that spinoffs produced 27% annualized returns over two years, versus 17% for the S&P 500.
There's even an ETF dedicated to investing in spinoffs – the Invesco S&P Spin-Off Fund (CSD). And over the past five years, it's up about 121%. That beats the State Street SPDR S&P 500 Fund's (SPY) roughly 75% gain over the same time frame.
And the current spinoff calendar is as busy as ever...
Two Types of Spinoffs You Should Know
Spinoffs tend to fall into two broad categories.
The first is when a fast-growing business is buried inside a bigger, slower-growing company. The spinoff allows the growth company to trade on its own – usually at a higher valuation.
A great example of this is GE Vernova (GEV). It spun out from General Electric in early 2024.
General Electric was a slow, sprawling industrial conglomerate. Meanwhile, the Vernova businesses were focused on high-growth markets like power generation, grid modernization, and the broader energy transition.
The spinoff was a hit. Take a look at GE Vernova's rally since the stock started trading on its own...
The second category of spinoff is the opposite situation – when a parent company is held back by a slower legacy business.
A great example of this is Eaton (ETN). Its spinoff hasn't happened yet.
In January, Eaton announced it would spin out its Vehicle and eMobility business segments, which make truck transmissions, clutches, and electric-vehicle ("EV") components. Their declining revenues are dragging down the valuation of the whole company.
Meanwhile, Eaton's Electrical and Aerospace segments are benefiting from growth in grid modernization, AI data centers, and defense spending.
These businesses are seeing double-digit growth in revenue and backlog. The spinoff will let the market price them for what they're actually worth.
Spinoffs Are the New Way to Play AI
Plenty of major spinoffs have been completed since early last year. And they're great examples of how these can be used to invest in AI...
In February 2025, tech hardware firm Western Digital (WDC) spun out Sandisk (SNDK), which makes flash memory chips. These store data in everything from smartphones and laptops to AI data centers.
Thanks to the AI boom, over the past 12 months, Sandisk's revenues jumped to roughly $13 billion. And its earnings before interest, taxes, depreciation, and amortization ("EBITDA"), which measures profitability, soared to $5.6 billion.
Last October, Honeywell spun out Solstice Advanced Materials (SOLS), which focuses on refrigerants, semiconductor materials, and data-center cooling solutions.
It reported revenues of about $3.9 billion and EBITDA of $927 million last year.
And last November, Chemical giant DuPont de Nemours (DD) spun out Qnity Electronics (Q). Qnity makes the advanced materials and chemicals that go into semiconductors and electronics manufacturing.
Qnity posted sales of about $4.8 billion and EBITDA of $1.4 billion in 2025.
Folks, as I'm sure you noticed... the AI and infrastructure theme runs through all of these spinoffs. That's partly why they got separated in the first place.
Importantly, institutional investors are buying too...
The smart-money activity has been largely positive in recent months for all three spinoff stocks I just discussed. If the smart money is buying a stock, it's definitely worth taking a closer look.
Of course, spinoffs aren't a magic formula for gains. But in a market this narrow, they can offer something valuable...
Companies trading on their own merits and management teams with real "skin in the game." That's well worth your attention.
Good investing,
Joe Austin
Editor's note: To catch the next wave of AI-driven gains, you need to look beyond today's winners. That's why on Wednesday at 10 a.m. Eastern time, Joe will go online with Chaikin Analytics founder Marc Chaikin to unveil their first-ever AI-powered product... a historical scanner they call the "Time Machine." Find out how it could help you profit from the next generation of market-defining stocks.
Further Reading
AI spinoffs allow you to get in on the ground floor of great tech. And as our colleague Mike Barrett says, "I'm always on the lookout for companies at the intersection of imagination and technology – especially smaller companies that are still early in their growth."
The world's most powerful AI may never become available to the public. You see, a new, private tier of AI tools has emerged. And there's a strong chance that limited access will become the norm.
Market Notes
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
Moderna (MRNA)... biotechnology
Morgan Stanley (MS)... financial giant
Bank of Montreal (BMO)... financial services
State Street (STT)... investment services
Intel (INTC)... chipmaker
Taiwan Semiconductor Manufacturing (TSM)... chipmaker
Lam Research (LRCX)... chipmaker equipment
ASML (ASML)... chipmaking machines
Western Digital (WDC)... hard drives
IDEX (IEX)... industrials
W.W. Grainger (GWW)... industrials
Cabot (CBT)... batteries and chemicals
Rockwell Automation (ROK)... automation
Caterpillar (CAT)... construction equipment
Hyatt Hotels (H)... hotels
IMAX (IMAX)... movie theaters
Cheesecake Factory (CAKE)... restaurants
Callaway Golf (CALY)... golf equipment
Tennant (TNC)... cleaning equipment
Dominion Energy (D)... utility
NEW LOWS OF NOTE LAST WEEK
AT&T (T)... telecom
Comcast (CMCSA)... telecom
Equifax (EFX)... credit reports
TransUnion (TRU)... credit reports
Copart (CPRT)... used cars
Kroger (KR)... grocery stores
Wix (WIX)... website maker
Zillow (Z)... online real estate
Accenture (ACN)... digital consulting
Boston Scientific (BSX)... medical devices
Adobe (ADBE)... cloud services