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Hidden Public Offerings

 April 27, 2012 11:09 AM
 


(By Chris Mayer) We all know Wall Street is playing with a rigged deck. And you can't find a more crooked game than with IPOs. Yes, Wall Street — and the financial media — loves the idea of taking hard-earned money and using it to gamble in the hope you'll end up owning the next Amazon or Google.

Last year, it was the hype around LinkedIn and Groupon. This year, it's Facebook. Chances are you're gonna get suckered. On average, studies have proven IPOs underperform the market by 30% in the three years after going public.

Here's just one example: LinkedIn.

If you participated, you saw the share price climb as high as $122 on the very first day, before settling to $94 and a quarter. That's a big jump from the $45 entry price.

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However, most individual investors couldn't see those gains. Institutions get first crack at IPOs. Those who jumped in after Day 1 have seen days of major disappointment when the stock traded as low as $59 and climbed back to only where it was bought at. So much for all the excitement…

IPOs mean buying something the insiders no longer want at a price they'd never pay.

Let's not spend our valuable time lurking about in these statistics in The Journal of Finance. I see far better deals out there in the public offering markets right now. Allow me to share with you the one class of public stock offerings that I think are worth your time and initial investment.

You probably don't hear about these — even though they routinely beat the S&P 500.

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From 2002-March 2012, an index tracking this class of offerings beat the overall market by 226%. Look at recent history and you'll find companies like American Express, Home Shopping Network and Marriott Hotels directly involved in these deals.

But despite these incredible returns, these offerings get none of the "hype" of IPOs. That's why I call them "Hidden Public Offerings" (or HPOs)…

They're hidden because they just don't get the press that IPOs do, but they're a great way to exploit inefficiency in the market to help you outperform in your stock portfolio.

How Do Hidden Public Offerings Work?

When company insiders want to maximize the value of an asset they own, they may chose to do so by "splitting off" a section of their business into a wholly separate business. You can buy shares in that new business. This is referred to as a spinoff or Hidden Public Offering.

I consider spinoffs to be hidden because they don't jump off the investment shelves the way IPOs do. Often, the asset itself is "hidden" on the balance sheet of a company; it's not the main item that attracts present shareholder interest. Yet the asset will have a real value on the open market (often not the same value it holds on the parent company's balance sheet). A spinoff helps "discover" the true value of that asset.


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