CITI: These 14 companies are ripe to be broken up — and history shows a 'highly effective strategy' for investors

Lumberjack

Sometimes it makes more sense for a big company to break itself up.

It's especially true when one segment of the business is underperforming. And when managements reach this decision — or are forced by activist shareholders — they provide an opening for investors to increase the valuation of the spun-off entities.

"Spin-offs are good news for shareholders," Robert Buckland, an equity strategist at Citi, said in a note on Wednesday.

"Buying shares in companies that spin-off assets has been a highly effective strategy. Citi analysis shows that historically, both the parent and the spun-off company outperform in the year after the announcement."

Many spin-off candidates start outperforming before the announcements, Buckland said, as investors speculate on the news.

Citi's analysts identified 14 US companies that could unlock more value in a spin-off, mostly in the industrials and information technology sectors. Here are the stocks to keep an eye on, ranked in ascending order by market cap.

NuStar GP Holdings

Ticker: NSH

Market Cap: $500 million

Sector: Energy

Comment: "The NuStar complex is expected to merge the two publicly traded vehicles, cut their distributions materially, and divest less core assets to raise capital to fund their capital expenditure requirements in 2018."

SemGroup

Ticker: SEMG

Market Cap: $1.8 billion

Sector: Energy

Comment: "After a series of large strategic acquisitions and divestitures in the last year, SemGroup is evaluating the sale of SemGas and SemLogistics in the near term and may consider the spin-off of their Canadian subsidiary named SemCAMS in the future after it grows further."

Orascom Construction

Ticker: ORSCY

Market Cap: $1.9 billion

Sector: Industrials

Comment: "The company has a valuable, overlooked 50% stake in a Belgium-based contractor which has a diversified business model with consistent dividend stream. While Orascom’s management explored the sale of this stake in the past, we believe it is still deeply undervalued."

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