This Special Situation Is Hiding in Plain Sight — Jim Osman
This Special Situation Is Hiding in Plain Sight — Jim Osman
When I want to know more about special situations, I turn to this guy. He’s been at it for more than three decades…
Jim Osman is the founder of The Edge research group. Global asset managers and hedge funds pay him a fortune to gain his insight.
The reason is simple: He’s that good. And one special situation that he’s focusing on now is hiding in plain sight.
It involves three companies that were founded more than 100 years ago. And very shortly, they’ll be creating huge shareholder value.
- An Introduction to Jim Osman (00:00:00)
- What’s a Spinoff and Why Are They So Lucrative? (00:04:43)
- The McDonald’s Spinoff of Chipotle (00:14:45)
- When the Market Comes Down, It’s De-Risking (00:24:33)
- Avoiding the Inclination to Sell Your Spinoff (00:40:56)
Jim Osman is the founder of The Edge, a research firm that analyzes investment opportunities for hedge funds and global money managers. He brings more than three decades of knowledge and experience to the table. And when it comes to Spinoff, Special Situations, or corporate events, he’s the one I turn to for actionable ideas. He’s also a senior contributor to Forbes magazine where he writes a monthly column.
Before You Leave:
Charles Mizrahi: Jim, thanks so much for coming on the show. I really appreciate it. I’ve known you now for, I think, seven or eight years. Every time we get together I always learn so much from you.
Jim Osman: Thank you.
Charles: Jim, you sell research. Before we even start, I just want our audience to know you sell research services to global asset managers like hedge funds, big money managers. They pay you $12,000, $20,000, really big numbers. Why do they pay you so much money?
Jim: That’s a great question. You know, let’s take it another way. Someone might argue, “If you’re so good, why aren’t you doing it?” Well, as you well know, there’s a big uphill struggle to even raise cash at any point in the cycle. That’s always a big job.
I have just been passionate about helping money managers and helping people who really care for their money not lose it. I think the goal of any research or any product that anyone signs up to is just that. Start with a risk. I think in our era of spinoffs, it negates a lot of the risk from the fact the situations can be quite lucrative.
You have a natural downside protection. That’s what’s drawn me to the space. In a world where, let’s face it, arguably everything is cheap. Everything is cheap out there. There are great companies on sale at the moment. But you buy them and they’re 10% cheaper the next day.
So how does that work? Cheap names can get cheaper. Just to answer your question, we look in a niche space of spinoffs and special situations, which have a natural downside protection in the way they are orchestrated.
Charles: Great. I want to get into that because your company — The Edge — you focus your research on a very small area of the marketplace most investors don’t even go to. In that area which you will talk about in just a second — for example, spinoffs, and you will share with us what those are — most people don’t get that the less investors in a space the more inefficient the pricing is and the greater the opportunity.
Is that more or less right?
Jim: Pretty much. The line I always use, Charles, and the line I always tell everyone: It doesn’t mean being first or how smart you are, it’s looking in the right places. Frequently we can get very sidetracked and investors get sidetracked with focusing on, especially in these markets, where it touches their emotion.
They say, “Amazon is a great company. Why is it down? I’m going to hold on forever. I should buy more.” They are looking in the wrong places sometimes for where the real value is, especially with spinoffs — we can discuss that — in this sort of market.
I say to them that there are only three ways to make money. There really is. It’s insider information, which you’ll go to jail for. It’s faster dissemination of information, which computers are going to beat you every day of the week these days. It was great 40 years ago.
And much smarter analysis. It’s only in smarter analysis that investors are going to make money. What is your analytical edge of saying this stock is cheap? We all know that. What’s the behavioral edge of yourself and what you have in the market compared to everyone else?
We all agree Amazon is cheap. We ain’t just going to buy it, sell it and make money. It just doesn’t happen. We have to be different. Frequently in my years of investing, stocks don’t start off with a huge upside. They realize it and they evolve. That’s very important for investors to understand.
One, they have to be looking in the right place. Two, they have to have smart analysis. Three, they have to recognize that this story can evolve on what they’re looking at.
Charles: Let’s get into it. You look at an area of special situations, but specifically spinoffs. Most people have some idea of what spinoffs are, but you not only fish in that pond, you really do the research in that area and find a lot of opportunities. Let’s go through it for a second.
What is a spinoff for the layperson who has no idea what a spinoff is? Why are they so lucrative?
Jim: That’s a great question. A spinoff is a separation of a business from another business which is spun out and given out onto the open market without you subscribing for the shares or buying the shares. You get them whether you like them or not. That’s the one liner.
Charles: So this is not an IPO or initial public offering where you have to go buy something, you have to research or there’s a lot of hype. This is a big company. For some reason or another — you’ll share with us why in a moment — they decide to spinoff to current shareholders a piece of the business.
Maybe it’s not profitable. Maybe it doesn’t fit. Maybe the business will do better. For whatever reason, they spin it off to shareholders. Is that more or less what a spinoff is?
Jim: Yeah, pretty much. I think the overwhelming line within that, Charles is you’re going to get it whether you like it or not. If a company decides to spin off — let’s take a recent example. A lot of your clients, a lot of mainstream investors, everyday investors, have IBM maybe in their portfolio.
At least at some stage. IBM. We all know IBM. Now, how many of those investors, maybe six months ago, woke up in the morning, got another stock on their trading account and it was called Kyndryl. They’re looking at that and they’re saying, “Kyndryl. KD is the ticker. What is that?”
You got it because you own shares of IBM and they decided to spin off their outsourcing computer business. What do you do with that as an investor if you don’t understand something on your portfolio? You just get rid of it. There’s been a number of these through the years.
Like I say, investors will wake up in the morning and they won’t understand where they got these shares from. That’s part of the dynamics of spinoffs, particularly in this market. You’re just going to get them whether you like them or not and you’re not going to necessarily going to know you got them.
You’re just going to sell them and that provides an opportunity in itself.
Charles: Right, because you have shares in the hands of people who never wanted them, don’t know the value of them. I didn’t buy IBM to get this small little division. I bought IBM to get IBM. So out. I sell it regardless of price. Is that more or less right?
Charles: Let’s take it a step back for a second. Why would a company decide to do something like this? To spinoff Kyndryl? Why does IBM, a huge company, decide to say, “Let’s let this part of our business run as an independent company, independent managers, separate businesses altogether. We’re going to give the shares to shareholders.”
They usually have some type of proportion. They say for every one share of IBM you are going to have two shares of this. Or something like that. That’s known. On the management level, why does management do something like that?
Jim: Why would they do something like that? There may be 10 answers to that question. Let me give you three of the not basic but more common ways. When a company decides to spinoff, they will a reason. They will give that reason with the spinoff.
They will say, one, we want to realize great valuations for two distinct businesses. They will say one looks at the cloud and one looks at computer services. Then they say it just doesn’t fit in the business, we can get a better valuation between the two. We can enhance shareholder value with that. Whether that’s true is a different question.
Charles: Let’s hold up there. Because right about now when we are broadcasting this podcast it’s the anniversary — I think it’s seven or eight years — since eBay, a company most people know, spun off PayPal. So PayPal was part of eBay. Management decided, this was back in 2015, it doesn’t fit. Could you walk us through that?
Jim: Absolutely. You had a payments business and you had a marketplace on the simplest level. I think there was some activist investing by Carl Icahn as well at the time if I remember correctly. What they said was these businesses don’t fit together and we can realize two distinct valuations for the business.
We can separate those and you as a shareholder of eBay will get shares of PayPal. For the moment when that came out, I think I was one of the first to say it wasn’t a good deal and the shares kind of collapsed when they listed. It went on to be a very good company.
The rest is history. There’s been more payments. There’s been an impact on their business and things like that and the share price has come down. Things like that. But initially, there was huge value creation after the fork and these were two distinct businesses.
The premise of that, as you will know, is the fact that the one plus the one equals three. So we are getting a greater entire valuation for the businesses as a whole broken up. It releases value. That’s the greater valuation of two distinct businesses argument.
Charles: PayPal was snuck in there and the Street doesn’t know how to value it. It’s tucked away in eBay. It doesn’t have its own visibility. Management looks at that and says, “We can get more for this if it stands in its own limelight on its own.”
Learning from you for so many years, many of these companies are just doing unbelievably well — these smaller companies within these bigger companies, these divisions or segments — but the big companies are siphoning off all their cash. It’s like Cinderella. The ugly sisters go to the ball and she stays home.
Jim: You’re right. That’s one of the reasons. That’s the good. I’ll give you the bad and the ugly. A lot of your investors know Honeywell of course. Honeywell is a great company. A few years ago they were approached by an activist to break up their business.
In fact, we were slightly involved in that as well. What they did was they broke up into three parts. What Honeywell shareholders got was Resideo and I have forgotten the name of the other one now. It will come to me in a second. Both of those companies were spun off.
What Honeywell did, sadly, was dump all its debt onto the spinoff companies and those spinoff companies suffered. It’s like me saying, “Charles, we’re going to move out to North Carolina from Jersey. By the way, I’ve got all this debt. I’m just going to give you that if you don’t mind. Could you handle it? We’re going to fly.”
And they did. And Honeywell stock flew and Resideo and the other one went into bankruptcy.
Charles: The other one was Garrett.
Jim: Garrett Motion, of course. I don’t know why that escaped me. So yeah, on these two companies they dumped all their debt. Like I said, the difference between when a company announces what they are going to do and what they think to what actually happens is where we come in and analyze it.
We say, “Hold on a second. They said they were going to realize better valuations, but what about these billions of dollars’ worth of debt they just put on the company?” That’s not going to realize much of an evaluation. That’s where the analysis comes in.
On the face of it, that’s another reason why a big company might spin off a smaller company just to make it cleaner. It’s not that ethical really if you think about it. If you’re my child and I say, “Here’s a billion dollars of debt. We’re off. Can you deal with it please?” You don’t want that.
Charles: Shareholders be damned. They have to figure it out. Here’s the thing, Jim. Here’s the thing about this that you specialize in and you are good at. You look at the spinoff as its own company and you do a lot of legwork and analysis that most investors don’t do.
It’s not because they don’t have the time. It’s such an uneven game. They are getting a stock they never wanted, they never paid for it, they never intended, they never researched. You have a situation where shares of a company are given to shareholders who — mostly institutions — don’t want them.
That’s what creates the opportunity. Is that right?
Jim: I think partly, yeah. I have sympathy for the investors. Why should they get a share of a company they don’t know anything about? It could be a smaller company, a tiny company, put on their books and told it’s for the greater good. I mean, what do you do with it?
That’s where we come in. We’re looking at these spinoffs. Whether it’s just like you better get rid of it straight away because it’s going down. Like the case of Kyndryl with IBM where we said it’s worth $10. It went from $20 to $10. If you are an investor holding that you say, “Wait a second, what did I get?”
You aren’t creating any value. Like I say, it does take work and analysis, but that’s only part of it on the spinoff. There’s also spinoffs around now, which have got discarded by the market. Because they can make really great companies.
Charles: Yeah, those orphan companies that no one is looking at. Definitely, I want to get to that in a second. I just want to stay on this for one more second. I find it so fascinating, Jim, that most people don’t know how many companies that are household names that were born from a spin from a bigger company.
For example, most people don’t know Chipotle was spun off from McDonald’s. McDonald’s owned Chipotle. They spun that off in 2006. Chipotle went up, I don’t know, 2,000%, 3,000%.
Jim: I think it’s an interesting story. I had a guy come up to me. I was speaking at a conference. He said, “Jim, I had McDonald’s and they gave me this stock called Chipotle. I knew Chipotle.” He said, “It was pretty good. I got given it at $13. It went to $20 and I got rid of it. I thought I was the greatest trader in the world.”
Then it went to like $2,000 or wherever it is now. He didn’t know the value of that.
Charles: In all fairness, he bought McDonald’s. He knew a fast food business of burgers and fries. He had no idea about tacos. When he’s given this stock, wakes up one morning and McDonald’s decides to focus on the golden arches and not on Mexican fast food, which was a big mistake —
To spin off Chipotle, I guess they look back every time and say, “What the heck did we do?” But the value creation of Chipotle was up 2,000% or 3,000% — some crazy number. McDonald’s is no slouch. It went up maybe tenfold. But this was a 20 or 25 bagger.
Jim: The interesting thing about it is because they spin off, it’s not always bad, right? I gave a couple of bad ones. Kydryl went down, Honeywell dumped their debt. A lot are very good. We have done a study up to 2015 and we’re updating our conference for November to 22.
It shows that these niche businesses are very likely to get taken over. Let me give you a little secret and your listeners an insight because we have just found out that where we thought about 30% get taken over in about two years. Remember, these are nice businesses that get spun off into the market, specializing in what they do good with top management who are good at what they do.
Their incentives, their entrepreneurship, their skill will enable a great value in the future right? It’s our job to identify that. But take that for the moment. So, we have a system in the states where at two years we have a takeover rule. If a spun-off company gets taken over before that, the acquirer has to pay the tax.
If they don’t, two years is a prime time to get taken over. In our spinoff study, we found out that around 30% to 35% of spinoffs get taken over around that two-year rule. Why? Because they are totally niche, great businesses. What our study suggests now — and here’s the insight — that number has gotten higher.
In fact, there’s more spinoffs, but they are probably better quality spinoffs. Initially, when the parent dumps the company, let’s say for a bad reason like Honeywell and then it goes into bankruptcy like Resideo, then you can analyze that when they are down there, they can come back for a tremendous return.
This might be a lot for your listeners because they are thinking it’s a lot to do, but that’s what we do in terms of finding out the value of these names.
Charles: For example, this is another thing I was looking at a couple weeks ago. Circuit City has a used car dealership buried in there. That was CarMax. They spun off CarMax. Most people don’t know that. That’s another thing. Circuit City should have kept CarMax.
Circuit City went out of business, but CarMax is a fantastic company, a leader in the used car market.
Jim: Ultimately, the company initially might thinking they’re just going to say it’s a better valuation, we’re going to spin off and dump debt on it. When you put good management into a bad business that’s on its ass and they turn that around, then you can get very good businesses.
So what was initially bad — if you were given a business and you’re an entrepreneur and a lot of your listeners are entrepreneurs, if you were given a business the first thing you are looking at is, “How can I turn this around? How can I refinance the debt? How can I put people incentives so they work harder?”
All those dynamics come into play on the spinoff companies because they are brand new companies that have come to the market. Now contrast this with IPOs. IPOs have gone from $100 last year to about $5 billion this year. Why? Because no one wants to buy companies.
They are manufactured companies I want to sell you at the highest possible price to make lots of money for me. That’s a bad investment right off the bat. With spinoffs, you are getting them whether you like it or not. The company, you need to work out or we need to work out what the dynamics are behind it.
Whether it’s value creation or are they just trying to get rid of a bad company. Who are the management? How are they incentivized? All those things can be particularly interesting for us when we are trying to spot investments.
Charles: Now I’m seeing out there, and tell me if I’m right on this, bigness is bad. Companies are now taking the conglomerate and breaking it up. Deconglomeratization is now the new thing. We have some humungous companies, well-known names — and I think you have three of them in the article we’ll go through in a sec — that are now spinning off.
It seems like a win-win. The parent is going to do well and the spinoff is going to do well. What do you see? Do you see that trend happening with bigger companies looking to get smaller? Because bigness is very hard to manage.
Jim: Your listeners are at a special time. If they want something a little fresh, but in their value investing wheelhouse, good investing should I say. It’s not even value. Good investing. Smart investing. Spinoffs are the place to look.
From my experience, and I’ve been doing this for a long time now, some of the best spinoffs to short are the tops of markets where the valuation gets full, maybe it’s a commodity, maybe it’s something else. What the really interesting ones are when markets retrace.
Look, we can argue all day whether it’s the bottom of the market or not. Who knows. But when markets are depressed like they are now, valuations are on the cheaper side and you’ll get companies that are spun off. You’ll go, “Hold on a second. I don’t need that.” So you’re going to sell it.
So they become even cheaper. That’s where investors need to look. Why is this happening? To answer your question, “Are they going to get more?” Yeah, they are. We could have 12 or 13 spinoffs before the end of the year, for example. This is nuts. Why is it happening?
I’ll get into the companies in a second, but just to give listeners a background, it happens because you can’t IPO. We’ve seen that. IPO market has collapsed. You can’t sell a company. Do you want to buy a new company? Of course you don’t. SPACs are a dirty word. SPACs are never coming back.
So those three methods of getting rid of companies just don’t work. What’s your last resort right here to try to create value? As a manager, you need to create value. Can you raise the prices on people in a recession? Of course you can’t. Can you try to increase your margins? Probably not.
If you have businesses within businesses that are naturally better for a greater valuation, then you’re going to come to the spinoff space. You are going to spin those off to existing shareholders and you’re going to hopefully create more value that way. That’s why there’s more of these happening.
Charles: I see now what I saw in the first half of this year. There were close to 700 or so CEO of public companies that either resigned, were fired or retired.
Charles: If they’re not creating value now, especially when the chips are down, the market is down, the economy is running into a wall, if they don’t create value these guys are being shown the door. One way they are showing value now is to spin off companies, spin off divisions, spin off segments, to create value.
Otherwise, activist investors will show them the exit door rather quickly.
Jim: Absolutely. We work for activist investors, as you know. If you look them up, you will see Hillenbrand, which is one I believe should be spun off. I think the company is going through a strategic review right now. Activist investors will be buying some of these companies.
It was easy. It’s been easy for CEOs. They sit in their chairs, the price goes up. “Look at me. I’m great.” We all make money when the market goes up, right? It’s when the market goes down we’ll see how good you are. I wrote an article recently. Wealth is created on the way down.
That is a hugely way out there thing.
Charles: Let me stop you. That’s something I write to my subscribers all the time. Most people don’t get it. You make money in a bull market, but you create wealth in a bear market. I want you to elaborate on that because you are one of the few people that do get it.
Jim: I think I have a slightly contrarian brain. Well, a very contrarian brain in most things. Does it make me everyone’s biggest fan? Not really. But I say what I think. I think that as the market comes down, contrary to popular belief, risk comes out of the market.
It’s not increasing more risk. When the market goes up you are increasing risk by holding stocks. When the market comes down, it’s de-risking. People don’t view it like that. They’re like, “What do you mean de-risk? It’s riskier. You’re nuts. We’re going in a recession.”
No, no. If the price comes down, the valuation gets cheaper. You are having less risk for being in stocks. If I can have less risk and buy good quality companies for the longer term — I’m not talking about three months or six months. We don’t know what’s going to happen, the market is all over the place.
I don’t really care. If you can buy good quality companies at cheap prices, you are going to have those stories in 10 years. You are going to say, “You know what, I bought Amazon 10 years ago. You know what was happening then? Everyone thought everything was going to 0. Credit Suisse was collapsing. The economy was going mad. We had a lunatic government doing everything. I bought Amazon and now look at it.”
Right? If you can spot good companies in a down market at great valuations you are going to be benefitting. Five or 10 years from now you are going to be laughing. But, and here’s the big but, it takes a lot to remove that emotional edge from yourself to say, “Hold on. I think everything is going to zero.”
Let me give you a clue: Everything is not going to zero. From American companies, you have an S&P index which is fantastic. The best companies in the world. Never forget that. The S&P 500 are the best companies in the world and you can invest in that at a low price.
Given what the opportunity is, you’re going to take it because you just have to grin and bear it for the short term. So that’s what I mean by creating wealth.
Charles: I forget where I saw this but it was a great quote. It said if you are buying stocks for less than three years you are a stock picker. If you are buying them for more than five years you are a business picker. Business pickers make money.
Jim: I’m a massive fan of that. You have to invest like you’re an owner.
Charles: Right. If you own a business, what can happen over the next month, next quarter, next year? Who the hell knows? But over the long term you have to say, “Will this business be materially higher five years or 10 years from now than it is today?”
If you can’t answer that question, you should not be buying the company. If you can with some degree of certainty, it’s hard not to make money.
Jim: I agree with you, Charles. I would add into that for the listeners that they should be looking at great businesses, but not so much on their feeling. A lot of these businesses, like big tech you alluded to earlier, three years ago we thought everything was Amazon, Facebook, Google and that was it.
Now we’re thinking, hold on a second, these aren’t the biggest tech things ever. They could be a lot smaller. There’s a big breakup value in Facebook right here. You have to look at businesses where, yes, there’s going to be material value, but you also have to have the analysis to back that up.
You know what, is anyone going to really create another Amazon over the next five years? I’m not so sure. That’s where you’ve got to look. Those big businesses, if they are cheap enough, make sure they have an edge and a moat — in Buffett terms — to take them further.
And a visionary leader. I’m a big visionary leader fan. People don’t like Elon Musk. He’s a visionary leader. Take it or leave it. I don’t care. These are the sort of people you need to invest in. Do you like Jeff Bezos? Do you like Zuckerberg? Everyone would probably shake their heads. These are visionary leaders.
Charles: As we get closer to the end, I want you to give your insight. There are three household names of companies that have been around 100-plus years. I think one of them was the original entry in the Dow Jones. These three companies are now going to be spinning off their subsidiaries — parts of their business — over the next year or so.
Let’s go through them. The reason is, I think you wrote well about it, it’s because it’s hard to manage big, diverse businesses. It’s not a value creator. It’s like a two-headed llama. One end is pulling and one end is pushing. It’s hard to run huge businesses as we’re finding out now.
As the tide goes out you get to find out who’s swimming naked. A lot of these businesses are having problems. Let’s go through them one by one. General Electric, one of the original in the Dow. This company is 120 years old or so — probably even more.
They are made up of three companies, correct? What are the three companies they are made up of?
Jim: Let me give background on General Electric because I think it’s important. Everyone knows General Electric. I haven’t been in America as long as anyone on this listening has, but it was one of those companies where you were told to get into it. You were told to buy it.
You haven’t got General Electric? What? Are you nuts? That was forced on a lot of people. That was the right thing to do. It grew and grew and it was under great management. Then Immelt took over and he destroyed value in the company. There’s a big argument for that. We won’t go into that too much.
What it comes down to is General Electric was probably one of America’s worst disasters in companies the way that fell. We had some new management take over. They looked at what was going on and they started to say, “Hold on a second, this company does everything.”
Today it’s just not viable to do everything. You just can’t do it. Can you have a zillion businesses at once? No, I’m not sure you can. This has been on the radar since January 2018 for potential value creation opportunities. A few years later and now it’s a three-way breakup.
It’s going to take place in two parts: GE Healthcare by 2023 and GE Renewable Energy and Power spinoff to be called GE Vernova by early 2024. This leave its aviation business as the core remaining business.
The complex nature of this leaves it huge room for mispricing on where the cash goes, where the debt goes, what companies come out better, where the management are. This takes real analysis. If you want to make the most of that, and you asked me why people come to us, they say, “Jim, I need your expertise. What company is the better company to go for?”
I had a chat — this is just a side note on spinoffs — with one of the big GE analysts on the Street. He said, “After January next year I ain’t covering GE anymore.” I’m like, “Why?” He said, “Because they don’t do what I do anymore.” That’s where analysts get dislodged.
In your term, orphan securities, where they get dislodged and people forget about them. People are going to forget about this part of GE. So this company is splitting into three for value creation. This is kind of on its last leg. They have got to make some value here. It’s going to be super interesting.
It’s going to take a lot of work to find out where the value is. So that happens pretty soon.
Charles: We have General Electric, which was founded in 1892, after 130-plus years realizing they cannot manage three separate businesses and they’re going to spin off their healthcare and the aviation business. Is it aviation or power?
Jim: They are going to keep the aviation.
Charles: They are going to keep it and shareholders are going to wake up one morning and they are going to see shares of the healthcare and then they are going to see shares of the power business.
Jim: And you’re not going to be told. You’ll have something through your email, whether you see that or not.
Charles: Most people will have no idea what the valuation of this new GE healthcare business is. They will probably sell it. So that’s number one. The number two company you talked about is Johnson & Johnson.
Jim: Everybody knows it. Everybody knows that company, but how many people know they are spinning off? Probably I’d say very little. You know, big phama has always been reasonably OK as an investment I’d say. Slow burner. Nice dividends. But you have had the major players come into play over the last few years.
Pfizer for obvious reasons with the vaccine, whether you agree with it or not. They spun off as well. GlaxoSmithKline in separating their consumer segments. So big pharma, again, that ‘big’ word that goes with pharma is not so fashionable anymore. Those guys are slimming down.
What Johnson & Johnson is doing is separating their consumer health segment to focus on their developmental drug portfolio. The dynamics of what they do is all a bit of marketing for them. In this transaction, J&J will spin off its consumer health segment and retain the pharma and medical devices segment.
That’s what they are doing. They are creating value that way. It has little debt. What’s interesting about Johnson & Johnson is it has little debt and very little pension liabilities. It’s actually a very good company. This is going to happen Q2 2023. We’re expecting it to be value creation out of this one.
What can investors do now? Ahead of that, they can start accumulating the shares, maybe, if it’s at a cheap valuation.
Charles: Right. Buy shares of Johnson & Johnson right now before the spin does happen. By the way, the shares are down right now due to the bear market. When the spin does happen a year from now or so, they wake up one morning and they have shares of the consumer health company.
Jim: What we’re seeing, Charles, is a lot of the value coming up to the spin in good companies on the rally up to the spin because their value starts to get embedded in the share price. Investors here are very early. Your listeners are very early to look at this.
Again, check with your advisor, check with your broker. They probably won’t know anything. But once stuff gets filed, you are going to know where the cash is going, where the debt is going, which is the better company to hold. Ultimately, you are buying a good company right now in Johnson & Johnson.
Charles: Like you said, most analysts when these kinds of things happen, they just walk away from it or they don’t cover it as well. There are too many moving parts.
Jim: I spoke to Joel Greenblatt who everyone is going to know. He wrote that ridiculously titled but great book called You Can Be a Stock Market Genius. I said, “You know what, Joel, when you wrote that book in 1997, everything has come full circle.” Nothing has changed.
People sell the spinoff, analysts don’t cover it, no one knows what is going on with spinoffs. Nothing has changed. Nothing has changed, which is frightening considering we claim to be sophisticated investors. We’re not. Nothing has changed.
Charles: You know what I found from all my years working on Wall Street and knowing people like you — well, I think you know more people than I — is that most of these analysts and a lot great ones, many of them don’t want to work that hard in area where they have to go out on a limb and do a lot of investigative journalism and act like Sherlock Holmes.
It’s much easier to call up the CFO, get some information and look at what everyone else has researched on it. But to tear apart a company and look at it from the ground up and say, “What’s going to happen here,” you know what, I will find a company that’s easy to do and move on.
Jim: Our business is evidence of that. We have grown in the space. People come to us for that reason. Many analysts come to me. Let’s take the GE analyst. He says, “Jim, I don’t do aviation, but I do the other bit.” Is he going to break up the company? Of course he isn’t.
Where has that little piece gone? Where is that bit in the middle? That’s what we do.
Charles: That little piece will probably go on to be an orphan until it becomes a time in the marketplace where some analysts in aviation will pick it up and cover it.
Jim: That could be six months, nine months down the line.
Charles: It could be a year. The last company. We have one company, General Electric, which is going to be spinning which was founded in 1892. The other was Johnson & Johnson, founded in 1886. The last one is on everyone’s breakfast table — most people. It’s Kellogg’s, founded in 1906. They are going to be spinning as well.
Jim: We say Kellogg’s. It’s, in fact, Kellogg.
Jim: It’s Kellogg’s on the box, but their name is Kellogg. It’s kind of odd really. I am a big fan of intermittent fasting and all that. I thought people aren’t eating breakfast anymore. But then for Americans — I saw a study the other day — for Americans, breakfast is one of the most important meals of the day. That was just a side note.
What Kellogg are doing, they are going to separately list their fast-growing global snacks business from their plant-based business.
Charles: What are some of the global snacks that most people know about?
Jim: Global snacks are going to be things like — I’ve forgotten, Charles. You put me on the spot. I don’t eat snacks anymore.
Charles: That’s true. Jim, for those who don’t know, is a triathlete. He rides his bike and all sorts of other things. One of the famous one Kellogg has, which most people don’t know, is Pringles.
Jim: That’s right. Pringles. I never eat Pringles.
Charles: I wouldn’t think you would.
Jim: Just on the basis of looking at an investment like that, what I see is changing consumer habits. Young people. Not like us. We like to sit down and get a few Pringles out. Maybe not me, but I used to. Watch a movie or whatever. They are not desperately doing that, young people.
They like a little bit of plant-based stuff. They don’t eat too much. Whether you like it or not, it doesn’t matter. Whether we like it or not, it doesn’t matter. Recognize the environment. Recognize what’s going forward. Recognize the changing culture. It doesn’t always have to be about numbers.
Put a common sense lens on it. Say this is interesting. Plant-based foods, am I interested in them? Not desperately. But a lot of people are. That’s what you have to look at. They are spinning off as well.
Charles: Kellogg’s is an old company and they have really iconic brands. There’s Eggo and Pringles and Cheez-It and Nutragrain. Then you have cereals like Frosted Flakes. Then they have the plant-based, which is very small. They have meat substitutes, Morningstar and all that.
Investors are going to wake up one morning and be given two different companies and not know what to do with them.
Jim: They’re not. Natural inclination is to sell it. They don’t know what this is. It’s going to appear as a credit. It’s not going to appear as a loss. You’re going to have a credit. What are you going to do? This is where I come back to these bear markets.
I’m going to give you money in your account tomorrow and you’re going to see a bunch of money on your account and you don’t know what it is. I’ll take that. You sold it. Sadly, that’s the mentality that hasn’t changed.
Charles: If it wasn’t, we wouldn’t be making any money. You wouldn’t have spinoffs outperforming the S&P by almost two to one over the last decade or so — two decades. I always think about it when I look at these spins, do I own McDonald’s and am I passing on Chipotle? Is this the next Chipotle?
You don’t want to miss that. A 20 bagger or 25 bagger that was given to you and you watch it go up 50% or 60% and you said, “Wow, I feel like Warren Buffett. Let me sell and make a zillion dollars.” Or owning Circuit City. When you were given CarMax you said, “I invest in electronics. I don’t know anything about used cars.”
There’s so much here and so much inefficiency. That’s really where you, your company and your team shine.
Jim: Thank you for that, Charles. The mentality sadly with any investor, not just yours, not just ourselves — and we have to check our brains on this sometimes — is we want to snatch at a profit and we want to let a loss run. That’s the way we are.
Charles: Yep. Folks, Jim Osman, The Edge. You can follow him, which I do, on Forbes. He’s a Forbes columnist. He puts together one or two articles a month or so. I’ll put a link down below in the description to the articles. Really fascinating stuff. You give away everything in these articles.
By the way, you are one of the few people who go deep in these articles. You give your analysis. It’s like the stuff you sell for $12,000-plus. You could follow some of your articles and get some insight.
Jim: Thank you, Charles. I appreciate it. Like I said, I’m passionate about helping people. I’m passionate about people winning. I hope that comes through. I got another article tomorrow. I’m going to try to produce one a week going up to December. It’s my book coming up. That won’t be out until next year.
Charles: What’s the book on? I didn’t; know you were writing a book.
Jim: Yeah I was asked to write a book by a couple people, which sounds like I’m a bit special. I’m not. It’s about special situation investing. Like I said, I’m getting every experience good or bad and putting it down.
Charles: Alright, give me the first copy. Well, maybe the tenth copy. Give that one to your family. Defiantly I want one of those copies signed by you.
Jim: Absolutely. Watch out in the fall. Check in if you need me. I appreciate your time.
Charles: One more thing I want to call out because there are some guys on Wall Street that you would check your pockets after you speak to them, but Jim is not one of them. He gives back. One thing Jim has done for the past several years is he runs a conference free of charge for a small group of people.
All the money raised, which is voluntary, is for Alzheimer’s. You want to just plug that for just a second, Jim. Why you do it and how successful it’s been. I’ve been to several of your conferences already.
Jim: Thank you, Charles. I appreciate that. I am passionate about finding a cure for this terrible disease. We have the conference on 17th of November. We’re about to put the invites out next week. It’s a charitable conference. 100% of what everyone gives from the little fee Eventbrite takes goes to the charity.
It’s gotten bigger and bigger every year. Bloomberg, WSJ, Barron’s are covering it again this year. We get special people there who have real insight, who give up their time. You get a little bit of stuff from me, which is not the interesting part. You’ll get some proper people giving their advice and ideas.
People come for ideas. It’s one of those situations where everybody wins. The charity wins. You yourself win because you cover ideas. You get a free breakfast on me. The speakers get some publicity. It’s one of the rare occasions these days where everyone wins.
We’re in New York City. We have a maximum of 100 people only. 17th of November. If you want to check in on the website to say you want to be on the list for when it’s done, then check in. Yeah, I’m passionate about the charity and passionate about helping people.
Charles: Jim, I think this is the first year you are not having it on Zoom, right? The last couple years it was.
Jim: Yeah, the last couple of years for obvious reasons it was on Zoom. It went pretty well to be honest with you. It raised the most ever last year on Zoom. But I’m like you, I like meeting people. I like shaking your hand. I like smiling. I like eating some food. I just like seeing people.
So it’s back in person this year. The Penn Club, a fantastic place. I love it. Looking forward to seeing you, Charles.
Charles: Yeah, hopefully. The last couple of years we weren’t able to make it for obvious reasons because of the pandemic, but I hope to come and bring my analyst with me because we had a good time the first time. I think it was three or four years ago.
Jim: Fantastic. We got some great speakers lined up. We’re about to announce those in the next week. Thank you.
Charles: Beautiful. OK, folks, Jim Osman. In special situations, he’s the man. I tell you, when I have a situation with a special situation or spinoff, it’s his work I look to. I look right at it. He’s good. He’s just good. There aren’t that many people with 35 years in the business that know what they’re talking about.
Jim is one of them. Jim, I want to thank you for your time. Continued success in all you do. Thank you so much.
Jim: Looking forward to catching up. Thanks, Charles.
Charles: Take care.
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