How to Spot Hot Sectors’ Even Hotter Spin-Offs

How to Spot Hot Sectors’ Even Hotter Spin Offs image 050713 PC clarkHow to Spot Hot Sectors’ Even Hotter Spin-OffsWhen a stock market sector is hot, it always pays to look for spin-off trades. These are investments related to the underlying strength in a particular industry and stock market sector.

Housing, construction, and new home builder stocks have been soaring for quite some time now. And many businesses related to this sector strength have been powerhouse wealth creators.

In commercial and industrial building, large contractors haven’t been nearly as robust on the stock market as new homebuilders, but there are plenty of spin-off companies doing well.

Jacobs Engineering Group Inc. (JEC) is a $7.0-billion technical services company out of Pasadena, California that sells design, engineering, architectural, environment, and consulting services to clients in the oil and gas, aerospace, defense, infrastructure, and manufacturing industries.

The company has experienced a strong recovery rally on the stock market as momentum is returning to operations.

As we all know, new initial public offerings (IPOs) are plentiful when the stock market is hot. One interesting small company is Textura Corporation (TXTR) out of Deerfield, Illinois.

This company sells collaboration software that’s used specifically in the commercial construction industry. Products include efficiency software to help with invoicing and payments and bid preparation and testing software; the company also provides online environments in which participants in a construction project can collaborate and manage the massive scheduling efforts required among professionals and contractors.

The company recently sold 5.75 million common shares, including a full overallotment of 750,000 shares for $15.00 each. Total shares outstanding on the day of listing were 21.9 million. The position closed at $20.91 on its first day and is currently trading around $29.00.

Certainly the enthusiasm in the stock market is apparent in new IPOs. This was a strong start for a developing micro-cap like Textura. Wall Street expects the company to generate around $35.0 million in revenues this year. The 2014 revenue estimate is approximately $56.0 million with continued operating losses.

Founded by three former partners from PricewaterhouseCoopers, the company’s offering prospectus is a worthy read, and while it is a business plan with something to sell you, reading a prospectus is always useful.

According to the company, clients have used one or more of its on-demand collaboration products to help manage over 13,000 commercial construction projects worth over $125 billion.

Clients include 41 of the 100 largest general contractors in North America.

In the fiscal years ended September 30, 2010, 2011, and 2012, the company’s revenues were $6.0 million, $10.5 million, and $21.7 million, respectively. Net losses for the same fiscal periods were $15.9 million, $18.9 million, and $18.8 million, respectively.

While there is quite a bit of supposition in financial documents like prospectuses, they do offer details on the general business conditions in specific industries with which you may not be familiar. Like other U.S. Securities and Exchange Commission (SEC) documents, a prospectus can help shape your overall stock market view, even if you aren’t interested in the company.

While IPOs are typically overpriced, a strong debut on the stock market is helpful in legitimizing the story.

Textura’s strong stock market performance so far helps it stand out, and because of this, more investors are getting to know the company’s story. (See “New IPOs Hitting the Tech Sector; Microsoft and Intel Struggling.”)

Most micro-cap companies have a strong entrepreneurial founder leading the enterprise. But businesses founded by people who identify a niche that isn’t being fully served in the marketplace can be very successful. Textura is the perfect example of that.

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