We try to identify stub situations where the value is significantly in excess of its current implied value. This methodology allows investors to capture the unrealized value of the stub, while simultaneously hedging market risk. Tracking Stocks Companies create these stocks to track the fortunes of one or more of their subsidiaries. We view tracking stocks as distant cousins to spin-offs. The parent and tracking stock operate under one management team and one board of directors, even though the tracking stock s finances are reported separately from the parent.
Companies issue tracking stocks to hopefully unlock value in their underlying subsidiary.
Issuing tracking stocks is always a tax-free procedure and if either of the two units were losing money, the earnings from one would offset the losses of the other for tax purposes. Borrowing costs for the tracker are usually lower because it relies on its parent s higher credit rating. Overhead costs are lower than if the two were separate. If synergies exist between the parent and the tracker, there are added benefits. As with spin-offs, the biggest reason for issuing tracking stock is the potential to goose the parent s stock price.