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ERROR: type should be string, got "https://www.barrons.com/articles/how-to-play-a-honeywell-spinoff-1539025619\nHow to Play a Honeywell Spinoff\nAl Root\nOct. 8, 2018 3:06 pm ET\nCharly Triballeau/AFP/Getty Images\nLast week, Honeywell International (HON) declared the stock dividend of its building-products division called Resideo. This event completes Honeywell’s portfolio transformation announced last year. Resideo will hold an event for investors on Wednesday, before the spin occurs on Oct. 29. Though still weeks away we’re comfortable predicting that the first few months of trading won’t be very good for the newly independent Resideo.\nIt’s not that we see anything wrong with Resideo. But spinoffs have their own life cycles, and where a company is in that cycle can determine whether it is set to rise or fall. First, there’s usually an activist investor who decides there is some value that can be unlocked from a parent entity. Or, activist management teams decide their business has become too unwieldy to manage effectively. Then the spin is announced.\nThat’s all well and good, but it does create a problem. After the spin, investors who own the parent company get shares in a business that they usually don’t want to own. For example, if an investor owned Honeywell for its aerospace business, they found themselves with an automotive turbocharger business, Garrett Motion (GTX) on Oct. 1.\nThat’s only the most recent example. Investors who owned Alcoa (AA) for its aluminum-mining business found themselves holding shares of aerospace supplier Arconic (ARNC) after its 2017 spin, while Johnson Controls International (JCI) investors found themselves holding a car-seat supplier with significant Chinese exposure when Adient (ADNT) was spun, a deal that left industrial-stock analysts asking what to do with an auto-parts supplier.\nThe inevitable result is that parent-company shareholders punt on their spin-co stock. That obviously puts downward pressure on spin-co shares for a nonfundamental reason.\nThere is one other reason spun companies trade at a discount. It’s the fog of war. Analysts don’t have estimates yet, the range of estimated earnings is wide, some are dropping coverage while others are launching coverage. Investors don’t want to take the additional risk associated with Street-generated volatility.\nBut as the shares sink deeper, value investors—a breed of animal that is attracted by the scent of big drops—appear on the scene to evaluate fundamentals and identify bargains. A 20% discount to a stock’s peer group or a price-earnings ratio that is two points too low are good rules of thumb. That means if the comparative firms trade at 17 times earnings, then 15 times earnings is a good point to take an initial position in spin-co. There’s nothing magical about the 20% number. It’s just a figure that comes up time and again in conversations with investors. Deep-value investors typically wait a few months for a stock to get truly washed out, and if it trades at that discount then, they jump in. That can lead to big gains, when valuations finally normalize.\nThe life cycle isn’t over at this point. If the stock runs up, the deep-value investors take their profits by selling the shares to the correct portfolio managers: Industrial companies finally reside in industrial stock portfolios; aerospace specialists own aerospace stocks; and consumer-cyclical analysts recommend automotive stocks to their consumer-cyclical clients.\nNow the fundamentals of the underlying industry take over, and stock performance becomes a function of earnings, estimates, management execution and growth. The spun companies are, by definition, smaller than the parents, so after normalization the phase of corporate actions begins. Some, like Fortive (FTV), spun by Danaher (DHR), has started buying other industrial companies to get bigger. Other spun companies find themselves targeted by private-equity firms or other larger entities within its industry. That’s what happened to Arconic, which is said to have attracted interest from a group of private-equity firms, including Blackstone Group (BX) and Carlyle Group (CG).\nAnd then the cycle can start again.\nReview & Preview\nEvery weekday evening we highlight the consequential market news of the day and explain what's likely to matter tomorrow.\nHoneywell spinout Garrett is still in the sell phase, and that stock has fallen 24% from its open in September. It now trades at a discount to other traditional-automotive suppliers that make internal-combustion technology even though its core technology—turbochargers—actually grows faster than global auto sales. Garrett is also covered by just two analysts right now and one is a spinout specialist firm. At some point, value investors will likely come calling.\nKeep this in mind when Honeywell spins off its second company this year. Resideo is a residential-technology business that makes thermostats among other products. It will appear in the portfolios of people who want to own aerospace stocks, and will compare it to companies such as Johnson Controls, Schneider Electric and Emerson Electric (EMR). Those firms trade at 12, 13, and 21 times forward earnings, respectively. Honeywell trades at 19 times. It unlikely its holders will want to own Resideo for the long term. Making life for more difficult for the company, its spin will come at a time that building-materials stocks are struggling. The SPDR S&P Homebuilders ETF (XHB) home builder index is marginally higher Monday after 13 straight trading days of losses, and iShares U.S. Home Construction ETF (ITB) is down about 22% year to date.\nOur advice: Listen to Resideo’s analyst event this week, pick up some housing tidbits, then wait. Come December, the time might finally be right to buy.\nWrite to Al Root at allen.root@dowjones.com\nLast week, Honeywell International (HON) declared the stock dividend of its building-products division called Resideo."