Issue #4, Volume #3
Good Ones Can Be Great… Bad Ones Can Be Downright Awful
This is Porter’s Daily Journal, a free e-letter from Porter & Co. that provides unfiltered insights on markets, the economy, and life to help readers become better investors. It includes weekday editions and two weekend editions… and is free to all subscribers.
Past issues can be found here.
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Topgolf shanked it… Most spin-offs succeed… A little-known gravel maker could shine… Three main reasons why spin-off shares fall… All good reasons to buy… Gold’s remarkable rise… Gemini eats into ChatGPT market share… |
Last month in Porter & Co.’s flagship publication Complete Investor, Porter reported on building-supply company Amrize, which was spun off from a much larger firm in the same industry. The business is a winner in and of itself, but the fact that it had been pulled away from a larger company has left many investors wary of it – leaving its share price floundering.
Today, Porter turns the Daily Journal over to Distressed Investing’s Marty Fridson, who shares the dynamics behind investing in spin-offs, explaining why some soar and others sour.
Marty has a long background in trading, investing, and finance… Over a 25-year span with Wall Street firms including Salomon Brothers, Morgan Stanley, and Merrill Lynch, he became known for his innovative work in credit analysis. He is the author of The Little Book Of Picking Top Stocks – and as readers of his Distressed Investing advisory know, he’s also great at finding underpriced stocks.
Here’s Marty…
On November 15, 2025, Topgolf Callaway (MODG) announced that it agreed to sell a majority stake in its Topgolf subsidiary to private equity firm Leonard Green Partners. The driving range operator’s valuation in the deal was half the price that the golf equipment manufacturer, then known simply as Callaway, paid for it five years ago.
Topgolf Callaway disclosed more than a year earlier that it was looking to sell the driving-range business. In the end, the company not only had to take a whopping loss, but it was able to unload only 60% of the business.
The resounding failure of the Topgolf acquisition sheds some light on a positive factor highlighted in our recent Complete Investor report on building-solutions company Amrize (NYSE: AMRZ) – namely, the excellent returns produced by spin-offs. (The other virtues of the gravel and concrete producer include attractive industry fundamentals and a proven management team with a large equity stake in the business.)
Spin-offs don’t just perform – they outperform. A Purdue University study spanning 1965-2000 found that spin-offs deliver 10% annualized excess return. A S&P Global analysis of U.S. spin-offs from 1998-2016 revealed about 5.8% annualized outperformance. The Bloomberg U.S. Spin-Off Index (BNSPIN) was up 23% in 2025, outperforming the S&P 500’s 17% gain, with 22 major spin-offs exceeding $1 billion in market value.
One explanation for the bargain prices observed early on for spin-offs’ shares is that there are natural sellers among the investors who receive shares in a spin-off…
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New stocks don’t fit in the index funds that hold shares of the parent company that spun off the business
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Active managers may want out, too, since the spin-off’s shares aren’t included in indexes against which they’re benchmarked
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Spin-offs often lack substantial research coverage at the outset
Another reason that investing soon after a spin-off tends to work out well is that the new shares enter the stock market without the fanfare that typically accompanies an IPO. The company’s senior managers actually have an incentive not to pitch investors on the stock right away. They typically receive stock options around the time of the spin-off. They’ll ultimately make more money from those options if the strike prices are based on an initial, low valuation.
There’s no publicly traded stock for a separate Topgolf, so this commentary doesn’t constitute an investment opinion on any security. The purpose is rather to point out a less-discussed reason for the tendency of spin-offs to be good moneymakers for investors: They re-create value that got destroyed in mergers and acquisitions (M&A).
Shares of the combined Topgolf Callaway plunged 76% from their 2021 peak, even as its main competitor in golf equipment, Acushnet (GOLF), saw its shares gain 39% over the same period. Callaway’s manufacturing of clubs and balls turned in good results. But MODG’s share price was dragged down by new competition in driving ranges, contributing to decreased sales at existing Topgolf ranges. Meanwhile, rising interest rates drove up the cost of constructing new ranges.
Failed corporate marriages of this sort aren’t uncommon. They’re instigated by managers who’ve spent decades working their way up the corporate ladder to get to the CEO spot, gaining directors’ confidence in their judgment in the process. And they receive expert M&A advice from the most illustrious investment banks. With all that experience and brainpower in the mix, why do deals so frequently wind up wiping out millions or billions in shareholder value?
A big part of the answer is that shareholder value isn’t always foremost in the minds of the architects of M&A transactions. For one thing, there’s a correlation between company size and CEO compensation. Creating a bigger corporation through acquisitions is a way for company honchos to give themselves a nice raise.
Self-interest also helps to explain the ongoing train crash of doomed diversifying acquisitions. Investors can protect their portfolios’ values against downturns in any one industry by spreading their holdings across several different industries. The compensation of the CEO of a single-industry company doesn’t have that sort of insulation. So it’s rational for that CEO to initiate an acquisition in a totally different business, even if it detracts from, rather than enhances, shareholder value.
The M&A bankers’ incentives are even more perverse. They receive a fee for facilitating an acquisition but don’t suffer any financial consequences if the deal works out badly. In fact, they – or bankers at another investment bank – earn another fee for advising on the sale or spin-off of the ill-fitting acquired company.
Around 45 years ago I attended a presentation by a premier investment bank in which the CEO was asked about the high failure rate of M&A deals. He replied that many internal projects at corporations also fail. His answer wouldn’t fly today. The project management service provider Wrike reports just a 36% failure rate for internal projects – half the M&A failure rate found by Baruch Lev and Feng Gu, authors of The M&A Failure Trap: Why Most Mergers And Acquisitions Fail And How the Few Succeed.
In short, you often have the wind at your back when you invest in a spin-off. The discarded company’s value may rise substantially if management does little more than undo the damage inflicted when it was acquired for reasons that weren’t based on sound principles.
Three Things To Know Before We Go…
1. ADP shows the labor market continues to weaken. This morning, payrolls processor Automatic Data Processing (ADP) reported private-sector payrolls rose by 41,000 in December. Wall Street economists had expected a gain of 50,000 jobs. While this was an increase from November – which was revised slightly higher to a loss of 29,000 jobs (from a loss of 32,000) – it continued the clear downward trend in payrolls since October 2024. Additionally, ADP reported the private sector added a total of just 614,000 jobs last year – making 2025 the weakest year of job growth going back to at least 2011, not including the 2020 COVID shutdown.
2. Shifting leadership in the AI war. Google’s artificial-intelligence (“AI”)-based chatbot, Gemini, is eating into the formerly dominant market share of industry leader OpenAI’s ChatGPT. In the last 12 months, Gemini’s share of generative-AI web traffic rose from 6% to 22%. Over the same period, ChatGPT’s share fell from 87% to 65%. Google is quickly asserting itself as a major contender in the battle for AI dominance.
3. Gold is threatening the dollar as top reserve asset. The dollar’s status as the world’s primary reserve asset is under siege. Official global holdings of gold now amount to more than 900 million ounces, worth roughly $3.82 trillion – nearly matching the $3.88 trillion held in U.S. Treasuries. The broader trend is even more striking. Over the past decade, the dollar’s share of global reserves has fallen from nearly 60% to 40%, while gold has surged to 22%. Today, foreign central banks hold more gold than U.S. Treasury debt as a percentage of their reserves. The dollar remains the top currency, but gold is quickly becoming the world’s preferred reserve asset.
And One More Thing… Today’s Poll
Three asset classes are worth watching this year. On Monday, we reported on our bullish outlook on gold, the Trump administration has been enacting policies that support crypto, and U.S. stocks have kicked off the year as red-hot as they performed in most of 2025. So as we begin the new year, we ask this:
Tell us what you think: [email protected]
Good investing,
Porter Stansberry
Stevenson, Maryland
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