Breaking up is easy ... and investors love itMarch 19, 2014: 12:03 PM ET
Spinoffs are in vogue.
On Tuesday, Hertz (HTZ) announced a plan to spin off its equipment rental business into a stand-alone publicly traded company. Reports of the spinoff first leaked Monday and shares rose nearly 5% as a result.
And shares of Sears (SHLD) popped earlier this week after the struggling retailer's board on Friday approved the spinoff of Sears' Lands' End clothing line.
So what's behind these corporate separations?
In short, the soaring stock market, according to Jim Russell, a senior equities strategist who helps oversee $115 billion for high net worth clients at U.S. Bank Wealth Management.
Russell said companies are operating in a low revenue growth environment, and there's a belief that they can unlock value by slimming down. "Lean and mean continues to be the focus," he said.
With stocks near all-time highs, some companies are hoping to drive their valuations even higher by convincing investors that they're concentrating on their core businesses. In Hertz's case, Russell said the company hopes to capitalize on its prized car rental brand.
General Electric (GE), a company that has long been viewed as too big and bloated, is in the process of spinning off its credit card unit as it looks to downsize its finance arm, GE Capital.
Once highly profitable, stricter lending regulations since the financial crisis have made credit cards less attractive, Russell said. The spinoff will allow the industrial giant to put more energy back into its traditional manufacturing division.
And unless overall corporate revenues start accelerating, Russell expects the spinoff trend to continue.
Spinoffs also can help improve the balance sheet of the parent company.
Hertz, for example, said the company said it will use the $2.5 billion in proceeds from the spinoff to finance a $1 billion stock buyback.
And Lands' End will pay Sears a $500 million dividend prior to the spinoff, providing a much-needed cash infusion for the retailer as it grapples with declining sales.
But spinoffs could also be a sign that a company made too many acquisitions in the first place, according to Bill Smead, a mutual fund manager in Seattle, Washington.
Smead said companies typically start to shed assets once they realize they're better off without numerous side businesses.
And even though investors are rewarding companies for selling off assets that no longer are strategic fits, Smead said he's not interested in buying newly spun-off entities.
For one, Smead said that the newer stocks often suffer in the short-term because investors of the parent company don't realize that they now own another company. That makes them more likely to sell their shares in the newly public firm.
Smead added that some companies should avoid the spinoff trend. He pointed specifically to eBay (EBAY).
Activist investor Carl Icahn wants the online marketplace to spin off PayPal. But as a long-time eBay shareholder, Smead wants to see the company stay together.
Still, even though he considers Icahn's day-to-day battle with eBay to be noise, Smead does agree with Icahn's basic premise on the stock. He thinks eBay is undervalued.