For now, spinoffs prove nauseating for investors

They’re all the rage on Wall Street, but not all turn out well

Wall Street celebrated Alcoa’s plan this week to split into two pieces. But investors should know similar spinoffs like the one the aluminum giant announced have not exactly turned out to be good news recently for shareholders.

Monday, the day Alcoa announced its move, its stock rallied 6% despite a brutal day for the market in which the S& P 500 fell almost 3%. ( Tuesday, Alcoa fell 1.5% in a fairly flat market.)

Anyone excited about Alcoa’s move probably didn’t know how similar moves by other companies have turned out recently: The Guggenheim Spin- Off exchange- traded fund, which tracks the performance of major spinoffs, is down about twice as much as the S& P 500 this year.

Spinoffs are all the rage on Wall Street recently because activist investors increasingly see them as a way to improve returns for shareholders and have been pressuring companies to break themselves into smaller and more efficiently focused businesses. By spinning off a unit or division, the activists argue that companies can cut away the red tape that prevented both entities from being the best- in- breed.

And the activists are having success in their efforts to force splits. So far this year, 34 companies have announced plans to spinoff units, and 25 have completed these deals, Joe Cornell of Spin- Off Advisors says. By year’s end, Cornell predicts 51 companies will have announced spinoffs, which is down from 60 last year but up from 37 in 2013.

Sometimes, the spinoffs pay off for investors. Shares of wireless spectrum license owner Straight Path, for instance, have more than doubled this year. It was spun out of IDT in 2013.

But Alcoa shareholders should know that there are big disappointments, too. Altisource Asset Management, a 2012 spinoff, is down more than 90% this year.