Veriton Investment

Spinoff Stocks Beat the S&P 500 While Conglomerate Shares Fall Behind

(Bloomberg) -- Pared down spinoffs are having a renaissance as the pace of their stock gains against multi-industry companies quickens. That’s led even the parent of the New York Rangers and Knicks to weigh a breakup.

Investors are increasingly rewarding single-portfolio businesses for their easy-to-understand structure with better valuations. So far in the first quarter of 2026 a gauge of US spinoffs is beating the S&P 500 Index by the widest margin since 2020.

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The outperformance has been powered by some of the benchmark’s best performers, led by eye-popping gains for Sandisk Corp., Qnity Electronics Inc. and electric power firm GE Vernova Inc. The basket of separated companies is also set for its longest streak of quarterly wins against the broader gauge since 2020.

“For a long time, the diversified conglomerates argued that scale and diversification created shareholder value,” said Alison Preiss, a partner in Simpson Thacher & Bartlett LLP’s mergers and acquisitions practice. “But we are seeing what I would call the ‘conglomerate discount’ reassert itself and investors are placing a higher premium on focus.”

In the past, breakups have been associated with shedding underperforming assets but investors have increasingly warmed to owning shares of companies that have been split off of a larger conglomerate. The argument goes that it’s easier for management to prioritize at a pared down company than when the businesses are buried within a larger and more diversified organization.

For some firms it’s a chance to call attention to better known assets. In February, Madison Square Garden Sports’ board approved a plan to explore a separation of its New York Knicks business from its New York Rangers business. Days later, Trump Media & Technology Group revealed it was in talks to spin off businesses including Truth Social into a new public company following its pending merger with TAE Technologies.

Sometimes activist investors push for break ups while other times it’s the firms themselves looking to unlock value in sectors where valuations have been rising, like defense and aerospace.

“There’s a very clear theme of companies trying to get their assets exposed just to aerospace, because we are in the middle of a very strong cycle,” said Michael Broudo, an event-driven desk analyst at Oppenheimer who has been tracking such companies for years.

Shares of Honeywell International Inc. — which spun off its specialty materials supplier into Solstice Advanced Materials Inc. last year — soared to record highs earlier this month ahead of an expected third-quarter breakup of its aerospace unit. Eaton Corp. plans to shed its mobility group by early 2027, narrowing its focus to the higher growth electrical and aerospace businesses.

Still, there are drawbacks. Smaller broken up companies chance losing their status in high-profile indexes where inclusion means many institutional investors are then likely to hold shares. Take Alcoa’s 2016 separation with Arconic Inc., with the market value of the new companies severed, neither was included in the S&P 500.

“Sometimes parents offload their spinoff with debt to get better financial structure,” Wendy Soong, a Bloomberg Intelligence analyst, said. But she noted, “the smaller entities might result in both parent and child losing market representation.”

Meanwhile, announcements of spinoffs from bigger firms have slowed amid this year’s market turmoil with only two S&P 500 companies announcing breakups compared to five deals during the same period last year, according to Soong.

Volatile markets can also spur profit taking. A measure of 26 companies spun off within the last four years has slumped a collective 5.7% so far in March as the US-Israeli attack in Iran rattled markets.

Yet breakups remain a way for company executives to squeeze out more from shares at a time of heightened market uncertainty, according to Adam Parker, founder of Trivariate Research.

“They think there’s an underappreciated asset that could be valued at a higher multiple hidden inside,” Parker said. “There’s a general sense that they can unlock value that way. So it makes sense in a volatile market.”