Hidden Gems: The Spinoff Opportunity

"Spinoffs are one of the most reliable places to find mispriced stocks — because the selling is forced, not fundamental." — Joel Greenblatt

When a conglomerate houses a high-return subsidiary inside a slower-growing parent, the market often values the whole group at a single, blended multiple — which penalises the better business hidden inside.

A spinoff can unlock that trapped value:

1. The parent trades at a low multiple, dragging the hidden gem down with it.
2. The subsidiary is spun off and becomes a separate, visible, comparable company.
3. The market re-rates it towards the multiple its quality deserves.
4. The value was always there — it simply could not be seen.

Greenblatt adds a behavioural twist. When a small business is spun out, index funds frequently have to sell it (it is too small for their mandate) and some institutions dump it for similar reasons. That forced selling has nothing to do with the business's quality — and it can create the entry point.

Illustrative example: a payments business spun out of its parent

A payments business once sat inside a larger marketplace company and was valued at the parent's blended multiple. As a standalone company it was quickly re-rated as a focused payments business at a higher multiple, and rose meaningfully in its first months of independence. The mechanism — visibility plus forced selling — is the lesson.