Phantom shares, real profits

Tracking stocks of company divisions grow more popular

Investors are hot on the trail of tracking stocks. Consider the case of AT&T (NYSE: T), which plans to offer a tracking stock for its wireless operations through an initial public offering (IPO) this spring. Initial reports, in early 1999, of the telecom giant’s plans drove its stock up 14% in three days-despite the fact that until then it had been one of the Dow’s poorest performers.

What exactly is this security that’s stirring so much interest? Tracking stocks are separately traded classes of shares that follow the business of a specific division or subsidiary of a parent company. These shares may be offered to current shareholders of the parent company or, through an IPO, to the public. Currently there are more than 40 tracking stocks, which are seen as more tax-advantaged to company operations and, thus, shareholders.

“Companies that issue tracking stocks usually have several different valuations or are in a time of transition,” says Michael Christmas, vice president of investments in the Chicago office of Salomon Smith Barney and a member of the Coalition of Black Investors. “With so many companies merging and redefining themselves, it may be hard to value all of its divisions, so assigning a specific tracking stock can make for more of a pure play,” he says.

Consider Hughes Electronics, General Motors’ (NYSE: GM) tracking stock. Hughes designs and manufactures cutting-edge electronic systems, including satellites-a far cry from GM’s core business of automotive products. The recently issued (NYSE: GO) (formerly Infoseek) tracks the Internet assets of media and entertainment conglomerate Walt Disney (NYSE: DIS). Some tracking stocks represent not-so-different segments of a company: Internet portal Excite at Home (Nasdaq: ATHM) plans to issue a separate tracking stock for its online content businesses.

Tracking stocks, like the new businesses they often represent, can take investors on a thrilling ride. Such has been the case with Sprint PCS, which tracks Sprint’s wireless division and enjoyed a gain of more than 300% in 1999. But Christmas underscores that they are often speculative ventures. “If a company issues a tracking stock and not a full-blown spin-off, it means it’s not prepared to make it final; the results are pending the outcome of certain circumstances,” he says.

To best play the tracking-stock craze, Christmas recommends evaluating the value of the underlying company. “So many infrastructure changes in technology are happening out there,” he says. “So investors should ask themselves, ‘Do I want the novelty of owning a tracking stock or do I want to own a company that will benefit from these infrastructure changes?’ There is so much value in other core companies and those [with] a lock on this will benefit going forward.”

To keep an ear to the ground for potential tracking-stock opportunities, visit to see which companies have completed offerings and which ones are pending.

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