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Why I’m Looking at Investing in Spin-Off Companies

Hi guys! I’m Tim Melvin, and welcome to A Better Way to Wealth!

You know, back in 2002, the folks at Bloomberg, the big news agency, wanted to know exactly how well corporate spin-offs were doing in real time.

They were drawing off of the fairly well-known study from Purdue University that came out about that time that looked at the stock market over 35 years, from 1965 all the way up to the year 2000.

It found that companies that were spun off from other companies actually outperformed the market by a considerable margin of about 10%, or approximately double the stock market’s rate of return.

Taking that information, Bloomberg put together an index of companies that had been spun off, tracking it in real time since 2002 over the last 20 years, to see how it would do.

Folks, it has crushed the market! The index has returned 973% over that time compared to just 342% for the S&P 500. That’s about a three times return, and I’ll take that any day of the week.

Now, I have learned to love corporate spin-offs over the years.

When a company spins off a division as a standalone, publicly traded company, the new management has an opportunity to shine.

Now they’re just focused on this one core business and don’t have to think about anything else that the parent company is doing or explain themselves to upper management, because now they are upper management.

They usually have equity in the new company, which means they have plenty of incentive to shine and do all the things necessary to get the stock price higher.

So, why am I talking about this today?

Well, a few weeks ago, an off-brand tobacco company named Vector Group, LTD (VGR) caught my eye.

Over the many years that VGR has been around, they have diversified their cash flows and invested some into real estate, especially since the pushback against smoking began in late 80s early 90s that diminished the tobacco business.

Back in 2003, they bought a very interesting company called Douglas Elliman Inc. (DOUG).

Douglas Elliman Inc.

DOUG is a luxury real estate broker. And, when I say luxury, I mean luxury!

To give you some idea, I looked at some of the properties on their offering list, and their most recent property under contract just sold in Palm Beach, Florida for over $55 million!

Obviously, they’re into selling super high-end real estate, plus they’ve been around since 1911, so we know they’ve seen a market cycle or two. 

The thing that you really must keep in mind is the rich people, meaning the 1%, 2% and top 5%, they’re somewhat immune to the recession concerns that might impact us.

If they decide they want a $30 million or $40 million piece of property down in Florida to get away from the New York and Connecticut winters, they’re just going to buy it, pretty much no matter what the economy is doing.

Why do I mention this? 

Because VGR just recently spun off DOUG, splitting the business up, but kept some of the properties that the real estate division owned and kept the core tobacco business. Everything else related to the real estate brokerage was spun off with DOUG. 

This stock is very attractively priced at current prices, trading at unreasonably low multiples of cash flow and earnings compared to other real estate brokerages.

And, while not entirely recession proof, DOUG certainly has the power, and customer base, to hold its own during any volatile times.

Remember, these guys are super high-end with a core market focused in New York City, being one of the largest brokers in New York City, but they’re also in the high dollar markets here Florida as well as California, Connecticut, Massachusetts and the high-end ski resort towns of Colorado.

Now, they market all over the US, but they also have an arrangement with Knight Frank, a large international real estate firm, that allows them to market the super high-end properties internationally as well as giving them access to some other markets across the globe.

They also manage super high-end apartment buildings and condo buildings in their core markets, again, with the management business primarily focused in the New York City area, and that’s a pretty big business.

They also have the full range of title and escrow services to help their buyers out. In fact, last year they bought 50% in a company called Biscayne Mortgage, LLC, so now they can offer mortgage financing on some of these multimillion-dollar properties that they’re selling. 

They’ve also been really innovative in property technology, putting the latest tech into the hands of their agents, brokers and property managers so they can do a better job selling and managing properties.

Remember, this is a great company that is gaining market shares in New York, California, Florida, Texas and Colorado, which, if you stop and think about it, with the exception of New York and California, are high-growth markets where the rich people leaving New York City and California are looking to move to.

When they get there, they will be looking for another high-end property, and DOUG will be a familiar name to meet them.

They’ve also got a business that helps developers sell and market high-end properties and developments.

Again, the core of that is located in New York, but they are making strong inroads in the Texas markets right now, according to their latest reports.

 Finally, they’ve got a division called New Valley Ventures that just invests in property technology startups and retains an equity interest in many of these companies, and a successful offering there can lead to huge profits.

They know the property business, are investing in something that they know pretty well and can use and all the companies that they’re currently investing in have developed programs and applications that are currently used by their property managers, agents and/or somebody in the DOUG system.

That is why I believe this is a great business that will have huge dividends as time goes by.

Post spin-off, it’s trading at eight times earnings, which are expected to grow over the next several years.

Folks, I’m just telling you that this thing is so cheap as a spin-off that I think, as a long-term investor, you have to look at DOUG as a potential 10-bagger.

The company is so undervalued and is such a good business that I think they have great success ahead of them as they continue to expand in the foreseeable future.

Now, when it comes to expansion, they’ve been very smart about it…

When the exodus of the rich started back in 2020 out of the northeast areas of California, DOUG was in their newly chosen neighborhood ahead of them, successfully anticipating the shift, and I think they’ll do a good job of staying on top of this market and growing the business.

I really do believe that long-term investors should be thinking of this as a unique opportunity to make 10 times their money over the long run.