CITI: These 14 companies are ripe to be broken up -- and history shows a 'highly effective strategy' for investors

Sometimes it makes more sense for a big company to break itself up. 

It's especially true when one segment of the business is underperforming. And when managements reach this decision — or are forced by activist shareholders — they provide an opening for investors to increase the valuation of the spun-off entities. 

"Spin-offs are good news for shareholders," Robert Buckland, an equity strategist at Citi, said in a note on Wednesday.

"Buying shares in companies that spin-off assets has been a highly effective strategy. Citi analysis shows that historically, both the parent and the spun-off company outperform in the year after the announcement."

Many spin-off candidates start outperforming before the announcements, Buckland said, as investors speculate on the news. 

Citi's analysts identified 14 US companies that could unlock more value in a spin-off, mostly in the industrials and information technology sectors. Here are the stocks to keep an eye on, ranked in ascending order by market cap. 

Companies ripe to be broken up
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Companies ripe to be broken up

NuStar GP Holdings

Ticker: NSH

Market Cap: $500 million

Sector: Energy

Comment: "The NuStar complex is expected to merge the two publicly traded vehicles, cut their distributions materially, and divest less core assets to raise capital to fund their capital expenditure requirements in 2018." 

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Ticker: SEMG

Market Cap: $1.8 billion

Sector: Energy

Comment: "After a series of large strategic acquisitions and divestitures in the last year, SemGroup is evaluating the sale of SemGas and SemLogistics in the near term and may consider the spin-off of their Canadian subsidiary named SemCAMS in the future after it grows further." 

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Orascom Construction

Ticker: ORSCY

Market Cap: $1.9 billion

Sector: Industrials

Comment: "The company has a valuable, overlooked 50% stake in a Belgium-based contractor which has a diversified business model with consistent dividend stream. While Orascom's management explored the sale of this stake in the past, we believe it is still deeply undervalued." 

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NuStar Energy

Ticker: NS

Market Cap: $2.2 billion

Sector: Energy

Comment: "The NuStar complex is expected to merge the two publicly traded vehicles, cut their distributions materially, and divest less core assets to raise capital to fund their capital expenditure requirements in 2018." 

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J2 Global

Ticker: JCOM

Market Cap: $3.6 billion

Sector: IT

Comment: "Potential split of BCS and Media business, although new CEO has talked this scenario down." 

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Ticker: CNDT

Market Cap: $3.9 billion

Sector: IT

Comment:"Conduent has some valuable hidden assets within the company notably its road toll and health card administration programs." 

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Trinity Industries

Ticker: TRN

Market Cap: $5 billion

Sector: Industrials

Comment: "Trinity has announced it will spin-out its non-railcar segments into a new growth-oriented infrastructure company by 2H18. This should unlock value in the rail-related segments, which on our SOTP analysis are worth near where current shares (including non-railcar segments) trade." 

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Citrix Systems

Ticker: CTXS

Market Cap: $12.6 billion

Sector: IT

Comment: "Spinning of Netscaler would remove hardware exposure for CTXS, which could make revenue stream more predictable and profitable. This could potentially drive multiple expansion." 

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Ticker: SYMC

Market Cap: $16.3 billion

Sector: IT

Comment: "Potential spin-off of the consumer business, which has a different profile than the enterprise business with lower growth and higher margin. So it could make sense to have different investors involved." 

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CNH Industrial

Ticker: CNHI

Market Cap: $18.6 billion

Sector: Industrials

Comment: "We think a spin-off of the company's Iveco operations could be a way to drive shareholder value over the next 1-2 years. Our SOTP analysis suggests 25-35% upside." 

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DXC Technology

Ticker: DXC

Market Cap: $29.4 billion

Sector: IT

Comment: "The spin-merge of its USPS business is another value-generating transaction for DXC (multiple arbitrage and cash distribution) as it remains our top-pick in the Payments, Processors & IT Services space." 

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Eaton Corp.

Ticker: ETN

Market Cap: $36.1 billion

Sector: Industrials

Comment: "Potential for further portfolio optimization which began with the recently-created Cummins JV." 

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Ticker: HON

Market Cap: $115.7 billion

Sector: Industrials

Comment: "The company is in the process of spinning off multiple businesses into separate companies." 

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General Electric

Ticker: GE

Market Cap: $125.9 billion

Sector: Industrials

Comment: "GE has said "all options are on the table" and we think there is significant optionality for the company within the portfolio." 

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