Numerous businesses issue "tracking" stocks—alternatively referred to as "targeted" stocks—in addition to their standard ordinary stock. A tracking stock is a common stock that "tracks" or is dependent on the financial performance of a company's single business unit or operating division—rather than on the company's overall activities. Tracking stocks are traded separately from the underlying stock. As a result, if the unit or division performs well, the tracking stock's value may increase—even if the firm performs poorly overall. The converse could also be true.
Shareholders of tracking stocks have a financial stake in only that company's unit or division. Compared to the company's common stock, a tracking stock typically has restricted or no voting rights. Tracking stock stockholders often do not have a legal claim on the company's assets in the case of a liquidation. If a tracking stock pays dividends, the amount paid will be determined by the success of the underlying business unit or division. However, not all dividend-tracking stocks track the S&P 500.
If you are interested in learning more about tracking stock, continue reading this page.
What Does Tracking Stock Mean?
A tracking stock is a sort of stock that a corporation issues to reflect a specific division or area of the firm. Tracking stocks enables investors to assess a bigger firm's distinct facets on their terms and at their price-to-earnings (P/E) multiples. While investors can bet on certain departments or pieces of a business, management can retain control without selling ownership or creating a distinct legal corporation that is spun off to shareholders (requiring its board of directors and management team).
Larger organizations can use tracking stocks to isolate the financial performance of a high-growth section. As a result, tracking stocks enable investors to obtain exposure to a particular facet of a larger company's business (e.g., the mobile division within a large telecom provider).
The 1990s were possibly the heyday of tracking stocks. They were essentially the outcome of ambitious management teams attempting to profit from valuation levels that appeared to be breaking new records practically daily during the dot-com boom. Even traditional, safe-haven blue-chip stocks joined the frenzy.
When a parent company issues tracking stock, the applicable division's revenue and expenses are decoupled from the parent firm's financial statements. The tracking stock's long-term performance is determined by the division's financial results or segment it tracks, not the parent business.
If the division performs well financially, the tracking stock will certainly appreciate regardless of how well the parent business performs. In contrast, if the division's financial performance deteriorates, the tracking stock will decline, even if the parent business continues to perform well.
Large corporations may issue tracking stocks to demarcate a portion of the business that does not fit neatly into the core business. A huge industrial corporation with a modest software development division is an example—additionally, companies issue tracking stocks to distinguish a fast-growing segment from the bigger, slower-growing parent. The parent firm and its owners, on the other hand, retain control over the division's operations.
Tracking stocks are registered similarly to common stocks following the Securities and Exchange Commission's standards (SEC). The issuance and reporting procedures are identical to those for new common shares. Companies' financial reports include a distinct part for the tracking stock and the underlying division's financials.
Tips
A tracking stock is a type of equity investment issued by a parent company to "monitor" the performance of a specific segment or division of the company.
The tracking stock of a corporation will trade independently of the parent stock.
The success of the division will mostly determine the tracking stock's performance it tracks rather than the firm as a whole.
Companies issue tracking stocks raise funds and provide investors with exposure to a single division.
Tracking stocks are subject to the same risks as other securities and often lack shareholder voting rights.
Sprint was one of the most enticing telecommunications firms in the United States in the 1990s. Its traditional landline companies were extremely lucrative and produced a generous dividend, and it had a new, intriguing cell phone segment.
Sprint recognized that cellular firms were being valued at exorbitant multiples as the internet boom accelerated, increasing the stock price to the point where even the dividend yield became inadequate. The telecommunications provider split its common stock into two classes of tracking stock, which trade under the ticker codes FON and PCS. This resembles a dual-class stock structure, although it differs from the traditional representation of such a capital structure. FON was handed the company's traditional landline business, the cash cow spewing money from local and long-distance agreements. Meanwhile, PCS was awarded the cellular business. Shareholders received one PCS share for every two FON shares they owned.
After PCS launched, demand was phenomenal. Many employees in the hitherto sedate realm of switchboards and telephone poles became millionaires as speculators drove the price of the cellular division's tracking stock higher. Investors' attention shifted away from balance sheets, income statements, and other fundamentals as stock prices increased.
When the bottom fell out, and growth fell short of a realistic dividend-adjusted PEG, Sprint's stock began to collapse along with the rest of the New York Stock Exchange and Nasdaq's overvalued equities. (The latter took 15 years to regain its previous high.) The company's board of directors decided to exercise its authority and consolidate the tracking stocks into a single ticker, FON, by swapping PCS shares.
While tracking stocks are becoming less prevalent, we may still notice some examples. Liberty Media is one such example. As of December 2020, Liberty Media held more than 76% of Sirius XM Holdings. 3 Liberty Media split its ownership of Sirius into three tracking stocks—LSXMA, LSXMB, and LSXMK.
Pros and Cons of Tracking Stock
For Investors
Tracking stocks enable investors to invest in a specific segment of a much larger organization. The appreciation potential of established conglomerates is frequently constrained because they have several divisions operating in diverse business lines. Tracking stocks enables investors to have exposure to only the most promising aspects of a business.
Additionally, tracking stocks enable investors to invest in business categories that match their risk tolerance. Investors must be aware of the dangers associated with purchasing a tracking stock when the parent firm is in financial distress or is not well established.
The parent business and its owners retain control of the activities of the tracking segment. Investors in tracking shares often have limited, or no voting rights, and creditors of the parent company would have a claim on the tracking segment's assets in the case of corporate bankruptcy (even if the segment was doing well).
For Companies
Businesses raise capital by issuing tracking stocks. Proceeds can then be utilized to repay debt, fund other growth projects, or expand the tracking section.
Through the activities of each tracking stock, businesses can evaluate investor interest in certain sectors of the business. For instance, a large-scale telecommunications company may employ tracking stocks to differentiate its wireless and landline services. The performance of the tracking stocks can be used to gauge investor interest in each division.
Additionally, tracking stocks alleviates management's need to establish a distinct business or legal entity for the tracked division. In the case of a spinoff, the split segment, for example, would require its board of directors and management team.
On the other hand, corporations that issue tracking stocks may be separating off their finest assets. If the parent business underperforms financially, the tracking stock's high-growth section will be unable to compensate.
Simple Techniques for Tracking Stocks
1. Establish the Portfolio
If you have not previously established a portfolio through an online brokerage account, you can use one of several free trackers that you can customize with your stock and fund holdings. For instance, Top1 Markets includes fundamental features that enable you to enter the number of shares you purchased and at what price. The trackers then update the value of each asset and the portfolio as a whole using slightly delayed stock quotes. By clicking on a stock symbol on this site, you may access a wealth of information about the firm, including recent news, historical share prices, and filings with the Securities and Exchange Commission.
Consider getting Top1Markets for additional bells and whistles. Traders can view their positions using a variety of metrics, including market value, risk, and position size. Additionally, the tracker analyzes their investment allocation, performance, and possible tax burden.
2. Get a Sense of History
Stocks tend to behave like pinballs in the short term, bouncing erratically whenever significant—or even not-so-significant—news is released. When investors have a lengthy time horizon, they do not need to watch stock prices every day and recognize that a day will not reveal much to the public. However, a stock's price action over time will tell consumers the tale better than anything else."
It is worth examining the stock's price movements across multiple periods, including bull and bear markets. Additionally, investors should compare its performance to the broader market, using a benchmark such as the Standard & Poor's 500-stock index and any other relevant barometers. Keep an eye on how the stock's price changes concerning the benchmark. Is the company gaining more than the market on good days—or vice versa? Is it up on down days?
3. Investigate the Source
The investor area of a company's Website typically provides a plethora of information, such as slide shows, fact sheets, historical data on the stock, recent news, and upcoming events. Additionally, traders will locate the financial reports that publicly traded companies must submit to the Securities and Exchange Commission.
Do not miss the quarterly earnings call, which allows you to listen in on a management meeting. During this teleconference, which is often aired live from the company's Web site several hours after an earnings announcement, the company's executives review the quarter's financial performance and provide additional information not contained in the earnings release. Frequently, the most educated segment of the call is the question-and-answer portion, during which financial analysts can ask questions. If you miss an earnings call, have no fear: companies frequently make a tape available on their Website.
4. Find an Expert Opinion
Collecting financial data about a business is simple, owing to websites such as Top1 Markets making balance sheets and income statements readily available. However, this unprocessed data requires some level of analysis. For instance, understanding a company's price-to-book-value ratio is only beneficial if the underlying notion is understood.
Of course, individuals can hire a professional to perform the heavy lifting. Full-service brokerage firms generate a great deal of research and analysis on behalf of their clients, who pay commissions and other expenses. However, we can receive reports from independent sources.
5. Become an Active Participant
As co-owner of a business, we have the right to inquire. Certain businesses are eager to expand their access to private investors. If we own shares in a small business, we should attempt to contact its executives. Numerous businesses employ an investor relations representative who can assist with inquiries and requests. A phone number is typically given on the company's Website or on the back of the annual report.
Additionally, individuals may wish to communicate with other investors. Online bulletin boards can be beneficial for exchanging ideas and thoughts, posting queries, and simply observing. Bear in mind that while postings might be informative, they can also be rash, frivolous, or just inaccurate. After all, we frequently have no idea who is writing the message. Is the investor well-informed (and well-intentioned)? Someone who appears to be in charge but is not? A paid shill for the company? Is he a short seller who spreads half-truths? As a result, we must exercise caution when using bulletin boards.
Keeping track of investments is becoming increasingly difficult. It is not uncommon for traders of stocks, options, and cryptocurrency to hold dozens or even hundreds of positions. Even for index fund investors, balancing 401k, IRA, HSA, and taxable accounts is no easy task. Introduce stock tracking applications.
Stock Rover
Stock Rover is comparable to drinking from a firehose. Its combination of research and portfolio management tools can be confusing at first. Stock Rover provides you with a variety of information on stocks, ETFs, and mutual funds. We can automatically link our investment accounts, obtain position and balance data, and then evaluate the portfolio. Additionally, the program includes preconfigured portfolios (such as the three-fund portfolio) that we can use to benchmark our investments.
Stock Rover is used by investors to conduct research and to compare their portfolio's performance to a variety of benchmarks. Stock Rover offers both a free and a premium plan with more features.
EquityStat
This free application lacks the functionality of Personal Capital or Stock Rover, but it excels at portfolio tracking. Investments must be input manually, although data can be imported via CSV file. It displays the current value and performance of positions. Additionally, it can generate IRS Form 8949.
While EquityStat lacks a rich feature set, it does have a good user interface that makes tracking the performance of a portfolio simple.
Delta Investment Tracker
This is the only tool on the list that we have not actively utilized. The Delta Investment Tracker is available exclusively as an iOS or Android application. Cryptocurrencies, stocks, mutual funds, commodities, currencies, futures, and bonds can all be tracked via the app.
The primary disadvantage of Delta is its inability to link to brokerage accounts. The app suggests that this feature is on the way, but no date has been specified. As a result, the majority of investments must be manually entered. It offers links to approximately 20 cryptocurrency exchanges.
As such, Delta is ideal for individuals interested in tracking Bitcoin and other digital currencies and a stock portfolio. Delta is not a good choice for those looking to monitor a portfolio of funds, particularly their asset allocation.
Kubera
We included Kubera on this list mostly for its potential rather than its current feature set. It is a paid tool ($15 per month). However, it comes with a rather limited feature set. Individuals can link their investment accounts, automatically importing their positions and balances. It enables individuals to keep track of the worth of a range of assets, including domain names. It integrates with the largest bitcoin exchanges and includes a function for tracking insurance plans.
However, unlike Personal Capital, it does not provide useful information on asset allocation. Additionally, it lacks a retirement planner and fee analyzer. Nonetheless, it is really simple to use, with a clear design. We are confident that they will continue to expand the tool's capabilities over time.
Google Sheets
Finally, Google Sheets simplifies portfolio management. Individuals can access information on stocks, ETFs, and mutual funds using Google financial tools. For instance, it is straightforward to import fund names, expense ratios, current price, and performance. This is a free spreadsheet that may be used to keep track of one's investments.
We generally utilize the spreadsheet for rebalancing purposes. It is straightforward to determine which asset classes are significantly overweight or underweight relative to the target allocation. It even specifies how much money has to be transferred to or from each asset class in order to rebalance the portfolio back to the intended allocation.
Before selecting an app or Website for tracking stocks and other investments, it is critical to understand our objectives. First, we must determine whether or not to connect our brokerage accounts to the app. Consider whether we want to track balances and performance or whether we want extra features such as asset allocation tools, retirement planning, and fee analysis.
Bottom Line
Thus, tracking stocks are distinct from other types of stock in that they represent a segment of a corporation rather than the complete company. On the other hand, they are similar to normal stocks in that their dividends are determined by the success of the business you invest in. As is the case with all types of stock market investments, the risks and rewards of tracking stocks must be carefully considered for each investor before taking the big jump.
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