Quick notes on an interesting spin $SN (part 1: set up)

Last month, SharkNinja (SN) quietly spun out of JS Global Lifestyle. I say quietly because I subscribe to a bunch of different spin-off services, and I don’t think any of them picked up on the spin. So, for me at least, the spin came and went without much fanfare, and I still think it isn’t on most investor’s radars. As far as I can tell, the only place it’s really been mentioned is:

1. Ok, this is just me, but I had one sharp friend ping me to look at it a few weeks back.

   1. Again, that’s pretty rare / low for a spin-off; normally I’ll have (at least) four or five people shoot me a “have you looked at this?” email.

2. This Barron’s article did a nice job covering the spin and laying out the bull case. Barron’s isn’t as “must read” as I’d guess it was ~20-30 years ago, but a mention in Barron’s still gets the article in front of a lot of eyeballs, so I can’t say that the spin went completely unnoticed.

3. My friend Nat Stewart did a nice article earlier this month.

So the spin isn’t completely unknown, but I do think it’s flown well under the radar and I’ve done enough work to have some insights that I haven’t seen anyone else mention. Plus, I haven’t really written about a potentially “actionable” public stock idea in a while (between the podcast and the premium side, I don’t have a ton of extra ideas lying around!), so I figured I’d throw some thoughts on SN out there.

This post started to run long, and a lot of times after publishing I’ll have interesting inbounds on ideas that I want to add to a post, so I’m going to split this into three parts to break it up and give the opportunity to add incoming thoughts. Those parts are:

1. SN set up / why it’s interesting (today’s post)

2. SN Overview and Bull Thesis (coming Friday) (editor’s note: part 2 is now live here)

3. SN Bear Thesis and closing thoughts (editor’s note: part 3 is now live here)

Let’s start with the most interesting thing about SN: how it came public. When most spins are prepping to…. spin, they file a form 10 with the SEC. For example, BLUE spun off TSVT in late 2021; here’s TSVT’s form 10. But most spin offs are coming from U.S. traded companies (i.e. BLUE traded on the NASDAQ, and TSVT was spun off and trades on the NASDAQ).

In contrast, SN’s former parent company traded in Hong Kong. It turns out that a foreign company looking to spin a company into a domestic listing files a F-1 (you can see SN’s here).

Why is that so interesting?

I have never seen a foreign company spin a domestic company. Perhaps it has happened before, but I certainly can’t remember it!

The book that made spin-offs popular is You Can Be a Stock Market Genius (which I consider the best book on modern value / event investing, so it’s highly recommended). The basic thesis Greenblatt presented is that a lot of times the shareholders of a company will receive a spin that they weren’t looking to own, so they’ll basically sell it indiscriminately. A classic example would be a mega-cap pharma company spinning out a small cap biotech. In a spin, the mega-cap pharma investors are probably receiving ~$2 in a new biotech for every ~$100 of the mega-cap they own. The investors in the mega-cap are likely there for consistent earnings, a steady dividend, etc. Suddenly, they receive a bio-tech that’s likely burning cash and betting on FDA approval. Given how small the spin is, it’s easy to imagine investors selling the spin indiscriminately rather than doing the work needed to hold the stock (in fact, many of the pharma investors will have a large cap mandate that forces them to sell much smaller spin)… and that indiscriminate selling can create opportunity for investors.

Now consider SN. It’s spun out of a Hong Kong stock, which means the investors who receive the shares were invested in a Hong Kong stock and suddenly own a U.S. domiciled stock.

That is, to put it bluntly, insane! There might be a lot of investors who owned the parent in Hong Kong who cannot own U.S. stocks for some sort of tax reason. Or maybe they just don’t want to. Either way, you can imagine waking up one day and saying “hey, when did I start owning this NASDAQ listed consumer goods company?” and selling the stock without much of a thought. I know if the situation was reversed (I owned a U.S. holdco and suddenly had a hong kong listed stock spun to me), I would at least consider selling!

So I suspect SN was more likely than the average spin to receive indiscriminate selling. And I suspect the way SN came public (spinning from a foreign company, not filing a form 10, etc) kept the spin off of most of the usual suspects radar.

That’s a powerful combination and a recipe for alpha.

That’s also it for today’s post. I’ll see you tomorrow for the overview of SN and the bull thesis.