I received an interesting email message today from a reader regarding Sally Beauty Holdings (SBH). The Fat Pitch Financials reader wrote:
I am a student at Harvard Business School looking at SBH for an investing club and I was hoping I could take a few seconds of your time for a few questions about your blog post re: SBH. How do you know that Sally will not be added… to the S&P Composite 1500 index or any other index? If it will not, when will Mutual Funds and Index Funds get the stock and then dump it? How long does it take for them to get and then dump SBH stock? Do you think it has already happened?
Thank you very much for your help/advice.
First, I just want to remind readers that I do not provide advice since I am not a qualified professional. I am more than happy to share my opinion however. Hopefully, you find my opinions and research useful, but you should always do your own research and form your own opinions about investing.
I am pretty surprised that Harvard Business School students would be interested in what I have to say and I am flattered. (You’ll often find that flattery will get you everywhere.) Let me try to tackle these excellent questions by the student investing club. (I sure hope I’m not doing their homework for them. Professors take notice.)
Question 1: “How do you know that Sally will not be added to the SBH be added to the S&P Composite 1500 index or any other index?”
I am never certain what Standard & Poor’s will do in the future. I do know that at the time of Sally Beauty Holdings spin-off, the stock was not added to any of Standard & Poor’s indices. I noted this in my original article on the Sally Beauty Holdings spin-off from Alberto-Culver Co. (ACV). My guess is that Clayton Dubilier & Rice’s significant position in this stock and their potential interest in acquiring this company will make the folks at Standard & Poor’s think twice before considering Sally Beauty for any index since it might drop off the index rather quickly and funds that are based on the S&P indices will not appreciate the turnover.
Question 2: “If it will not, when will Mutual Funds and Index Funds get the stock and then dump it? How long does it take for them to get and then dump SBH stock? Do you think it has already happened?”
I think the dumping by mutual funds and index funds has already happened. Index funds need to move quickly in order to minimize index tracking error. If you look at the price and volume history of SBH, you will see a spike in volume when SBH dropped to $7.76 on December 20, 2006. By January 10, 2007, it looks like the selling and volume finally wound down. Note, much of this price decline also came on bad news regarding a change in Sally Beauty Holdings relationship with L’Oreal that I wrote about on December 20th.
Another thing to keep in mind, many spin-offs trade before the actual date their shares begin to trade. I think many of the index funds dump their shares before the actual spinoff by using the when-issued market. I’m still learning the details of when-issued stock trading. I’ll probably write more about my experience in that market within the next few months.
Full Disclosure: I own shares in Sally Beauty Holdings and McGraw Hill (Standard & Poor’s).