Editor's note: One section of the markets often gets avoided... Investors frequently shy away from company spinoffs due to the uncertainty surrounding these businesses. And yet, they could be missing out on gains independent from the broader market. Our friends at our corporate affiliate Chaikin Analytics have seen this play out using their Chaikin Money Flow indicator to gauge what the "smart money" thinks about spinoff stocks. In today's Masters Series, originally published in the May 14 issue of the free Chaikin PowerFeed e-letter, senior analyst Joe Austin details the signs of a promising spinoff and shares an example of the Money Flow indicator pointing to bullish sentiment...
In a Narrow Market, Pay Attention to SpinoffsBy Joe Austin, senior analyst, Chaikin Analytics We've seen big gains in the markets recently, but plenty of folks are worried... Through the end of April, the S&P 500 Index gained more than 5% this year. And most of that came from just 10 stocks. And when markets are narrow like this, the risk is that one stumble could take everything down. Now, I'm always one for caution. But sitting around worrying about what the market is doing isn't going to make you any money. And if you think the environment is frothy, a great strategy is to look for things that can make money no matter what the market does. For that, consider spinoffs... This is when a public company breaks itself up and gives shareholders stock in the pieces. And spinoffs are interesting because at least initially, they tend to trade on their own fundamentals more than the market. There are some good reasons for this... First, many index funds and exchange-traded funds ("ETFs") dump the spinoff right away. It doesn't fit their mandate. This can push the price down for reasons that have nothing to do with the company itself. Second, the new company has little analyst coverage... an untested investor base... and no trading history. That uncertainty makes investors nervous. And some of them sell. But there's an upside, too...
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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 demonstrated the value created by spinoffs... One found that spinoffs outperformed the S&P 500 by about 10% per year in the three years after the split. 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 a main ETF dedicated to investing in spinoffs – the Invesco S&P Spin-Off Fund (CSD). And over the past five years, it's up about 111%. That beats the State Street SPDR S&P 500 Fund's (SPY) roughly 81% gain over the same time frame. And the current spinoff calendar is as busy as ever. So let's dig into them a bit more... 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 market won't pay for the business that's growing. 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 sprawling industrial conglomerate with lots of moving parts. Meanwhile, the Vernova businesses were focused on high-growth markets like power generation, grid modernization, and the broader energy transition. And the spinoff was a hit. Take a look at GE Vernova's surge higher since the stock started trading on its own... 
Then there's the opposite – when the parent company is held back by a slower legacy business. A great example of this is Eaton (ETN). And the spinoff hasn't happened yet. In January, Eaton announced it would spin out its Vehicle and eMobility business segments. These make truck transmissions, clutches, and electric-vehicle components. In the fourth quarter of 2025, Vehicle revenues were down 9% year over year. And eMobility revenues were down 15%. Those 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. Year over year, revenues for the company's Electrical Americas business soared 21% in the fourth quarter. Its backlog jumped up 31%. And revenues for its Aerospace business were up 14% year over year, while backlog was up 16%. The spinoff will let the market price the good business for what it's actually worth. Besides the Eaton transaction, other big spinoffs in the wings are worth watching... The most active "spinner" in the market is industrial conglomerate Honeywell International (HON). It has two spinoffs in progress, and one that just finished. Honeywell Aerospace is expected to spin out next month. Honeywell also expects to spin off its automation business later this year. Shipping giant FedEx (FDX) expects to spin off FedEx Freight next month. And media company Warner Bros. Discovery (WBD) plans to spin out Discovery Global in the third quarter. That's just what's coming. There has also been plenty of action on the completed side. Here are four big ones that caught my eye since early last year... This past January, media firm Comcast (CMCSA) spun out Versant Media (VSNT). Versant owns channels like CNBC, USA Network, E!, MS Now, and Syfy. Last year, Versant reported about $6.7 billion in revenues and $2.4 billion in earnings before interest, taxes, depreciation, and amortization ("EBITDA"). Chemical giant DuPont de Nemours (DD) spun out Qnity Electronics (Q) back in November. 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. In October, Honeywell spun out Solstice Advanced Materials (SOLS). Solstice is another materials company focused on refrigerants, semiconductor materials, and data-center cooling solutions. It reported revenues of about $3.9 billion and EBITDA of $927 million last year. In February 2025, tech hardware firm Western Digital (WDC) spun out Sandisk (SNDK). Sandisk sits right in the middle of the hot market for 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 EBITDA soared to $5.6 billion. Folks, as I'm sure you noticed... the AI and infrastructure theme runs through several of these spinoffs. Qnity (semiconductors), Solstice (data-center cooling and chip materials), and Sandisk (storage) all have direct exposure. That's partly why they got separated in the first place. Now, the Power Gauge needs 12 months of data to generate a full rating. As such, spinoffs will show as "Not Rated" for a while in our system. However, after 21 days of trading, the Chaikin Money Flow indicator starts to show whether the "smart money" on Wall Street is moving in or out of a stock... And we can use this as a good directional indicator to see where institutional sentiment is headed. For example, the smart-money activity has been largely positive in recent months for all four of the spinoff stocks I discussed earlier. (I'll also note that Sandisk has enough data to generate an overall rating – it's "very bullish" right now.) And if the smart money is buying, it's definitely worth taking a closer look. Of course, spinoffs aren't a magic formula for gains... But in a market this narrow and this dependent on a handful of stocks, spinoffs can offer something valuable... Companies trading on their own merits, sellers selling for reasons that have nothing to do with the business itself, and management teams with real "skin in the game." That's well worth spending your time on. Good investing, Joe Austin
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