A corporate spinoff is defined simply as a firm deciding to split a portion of its operations and distribute the shares to its shareholders. However, the rationale for a spinoff is significantly more complicated, ranging from financial or legal causes to competing strategic agendas. According to historical data, spinoffs and parents both generally outperform the market, with spin-offs having an advantage. A widely referenced research in The Journal of Financial Economics discovered “significantly positive” returns for both spin-offs and their parent company during the three years following separation when compared to the market as a whole. Moreover, multiple pieces of evidence back up the data. For example, the Invesco S&P Spinoff ETF, which contains companies spun out from larger corporations in the last four years, returned 74.44% in the last five years.
According to Bloomberg BNN, shares in companies split out from existing organizations beat the S&P 500 by an average of 10% over the next 18-24 months. Meanwhile, the companies that remain after the split perform in line with the S&P 500 for the year after the spinoff closure date. The pace of spinoffs in the United States is expected to quicken in 2025, owing to a string of recent successful spinoffs and growing pressure from activist investors. Speaking on this, Adam Parker, founder of Trivariate Research, stated the following:
“The strong performance of spinoff companies can serve as a barometer for management teams who are looking for successful ways to unlock value.”
For example, Honeywell, a corporation located in North Carolina that specializes in aircraft, building automation, and industrial automation, has revealed plans to split into three entities in order to increase stock returns. It intends to split its automation and aerospace technologies businesses by the second half of 2026, as well as complete the spin-off of its advanced materials segment. Elliott Investment Management, an activist investor, asked for the split last October, anticipating that it could “push the stock up 51% to 75% over the next two years.” Similarly, other firms are also in the process of disassembling themselves. DuPont is to spin off its electronics unit by the end of 2025, resulting in two separate firms, while car components manufacturer Aptiv is also splitting into two.
Our Methodology
For this list, we scoured Insider Monkey’s database of 1008 elite hedge funds’ holdings as of the end of the fourth quarter of 2024 and selected the top ten firms spun out in the previous four years that were popular among hedge fund investors. The list is ordered in increasing order by the number of hedge fund holdings in each business.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Is Kenvue Inc. (KVUE) the Best Spin Off Stock to Buy According to Hedge Funds?
A pharmacist at a local store, stocking shelves with products from the consumer health company.
Kenvue Inc. (NYSE:KVUE) is a global consumer health company that offers a wide variety of goods to improve daily health and well-being. Its product line ranges from over-the-counter pharmaceuticals, pain relievers, allergy treatments, as well as skin health and cosmetic items. Kenvue Inc. (NYSE:KVUE) became an independent company when Johnson & Johnson broke out its consumer health division in August 2023.
On February 7, Jefferies analyst Keith Devas reduced the price objective for Kenvue Inc. (NYSE:KVUE) shares to $26 from $27, while maintaining a Buy rating on the company. Devas emphasized that Kenvue is beginning 2025 with a solid plan targeted at enhancing its performance. Despite recording a less-than-stellar fourth quarter and a second-half-weighted forecast for 2025, the analyst stated the importance of the company’s ongoing transformation, which is now in its second year. To that end, Kenvue has excellent gross profit margins of 58% and an annual sales of $15.46 billion.
Overall, KVUE ranks 3rd on our list of the best spin off stocks to buy according to hedge funds. While we acknowledge the potential of KVUE as an investment, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KVUE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
