Cable One: A Spin-Off Favorite

09/29/2015 7:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

While IPOs get all the fanfare, a little-known group of public companies quietly goes public every year—spin-offs—observes Ian Wyatt, editor of Million Dollar Portfolio.

When a company is spun-off, the shareholders of the parent company receive stock in the new company. Oftentimes it's only a small piece of their overall investment in the parent company.

Many mutual funds and ETFs are legally required to get rid of their shares. This immediate selling creates downward pressure on the share price immediately following the spin-off.

That selling pressure can create an attractive buying opportunity. And our research shows that the typical company that's recently been spun-off performs well in the years following its separation.

That's because these newly public companies can operate without the influence of a larger holding company. Plus, their executives tend to be highly incentivized to lead their independent company.

One of my favorite media stocks is Graham Holdings (GHC), which had changed its name after selling its flagship Washington Post newspaper to Jeff Bezos.

On July 1, Graham Holdings completed the spin-off of Cable One (CABO) as a separate publicly traded company.

Cable One is one of the top ten cable companies in the US. It delivers cable TV and high-speed Internet services to nearly 700,000 customers in 19 states.

Like most recently spun-off stocks, Cable One shares have been falling.

Cable One shares went public at $450 and have traded lower ever since.

The reason is simple: shareholders who received Cable One shares in the spin-off began selling their stock.

I believe shares of Cable One should be trading at a multiple of roughly 10 times EBITDA. That would translate into a market valuation of $3.1 billion, equal to $530 per share.

As a newly independent public company, I expect that Cable One's earnings and cash flow will begin growing. Higher EBITDA should help propel this stock forward in the coming quarters.

With cable companies battling each other for customers, merger and acquisition activity is very high. That means consolidation throughout the cable business could prop up even higher valuations for companies like Cable One.

Looking forward for the next year, this stock could rise as much as 50%.

Buy Cable One shares below $430.

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