Joel Greenblatt on Market Outlook, Spinoffs, and Stocks to Buy

On Nov 27, 2021

We attended the Edge’s investing conference, which focussed on special situations.
Legendary investor Joel Greenblatt – who backed Michael Burry’s ‘Big Short’ – shared his top six tips for finding opportunities in today’s market.
Three other investing titans also shared their top recommendations in a stock market grappling with bubble concerns.

Over the years, Joel Greenblatt has surrounded himself with investing titans as a disciple of Warren Buffett and Ben Graham‘s investing philosophies. He famously provided seed money to “Big Short” investor Michael Burry to start Scion Capita and received his own seed money from “junk bond king” Michael Milken.

Between 1985 and 1994, the legendary investor averaged astonishing annual returns of 50% managing Gotham Capital — the predecessor of his current firm Gotham Asset Management.

This track record means many investors eagerly await Greenblatt’s take on the market environment. But these opportunities can be limited and infrequent. And he generally only tends to share his views with investors in his capacity as co-CIO of Gotham, to students as a teacher of value investing at Columbia University, or to readers of his books, such as ‘You Can Be A Stock Market Genius.‘

The Edge conference on November 18, hosted by top special situations investor Jim Osman, brought together seven industry experts who provided insights to help investors gain an edge in special-situation investing, while also raising money for the Alzheimer’s Association. Greenblatt shared his thoughts on opportunities in the current market.

Special-situation investing is Greenblatt’s speciality. It’s an area of investing where investors take stakes in companies based on a particular catalyst that carries with it the potential for a significant increase in future value. Such catalysts could include spinoffs, insider buying and management changes.

What excites Greenblatt are the opportunities for investors right now in spinoffs. These are the creation of a new business through either a sale, or distribution, of new shares of an existing division, or business within a parent company.

This year has brought more spinoffs than any time since 2011, according to recent Bloomberg analysis. Despite this, Greenblatt expects even more by the end of the year. Greenblatt suspects an expensive market that contains a lot of active money is driving this surge.

“There’s limited ways to create value,” he said.”I think people are searching very hard to push valuation, management is looking to push the valuation of their business to create value.”

This type of situation is ripe for mis-pricing, said Greenblatt, which makes it a compelling area for investors.

There’s four reasons a spinoff can do well, according to Greenblatt:

The spinoff company is smaller relative to the parent.
Management is now incentivized more directly with how the business…