New News Corp's wild ride

Shares of New News Corp have been all over the chart.

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Shares of the newly spun-off New News Corp (ASX: NNC) have been on a wild ride since they began trading on Wednesday. Investors gave their overwhelming support to the split last week, which has seen the media giant separate its publishing and entertainment operations into two distinct empires. The television and film divisions will soon be known as 21st Century Fox, but are currently still trading under the News Corporation (ASX: NWS) moniker.

Class B voting shares in New News Corp began trading at $15.35 on Wednesday before closing down for the day at $14.55. However, Thursday saw a strong rebound when the stock soared 15% to close for the day at $16.75. There will likely be more tumultuous trading days ahead as the market settles in to an assessment of the new entities' fair value.

The shares are currently trading on a deferred-settlement basis, which means that any investor buying shares today won't actually own the stock until the split is formalised on 28 June. The actual trading is set to begin on 1 July. The interim period will provide a chance for the market to get used to the new split.

Trading is being closely watched by analysts who speculate that US investors may dump their holdings in the New News Corp. Spin-offs can often be a lucrative opportunity for investors – particularly when a small successful division is spun off from a much larger parent company. The existing shareholders of the large company often have little interest in the smaller venture and so are happy to part with their shares for less than their intrinsic value. This can create an excellent buying opportunity for the savvy investor willing to invest in the undervalued small-cap.

However the New News Corp spin-off is far from a rapidly growing success story. The publishing operations that form the bulk of the new enterprise have been dogged by declining advertising revenues and shrinking readership bases. Given the headwinds that the company is facing, investors should not assume the spin-off magic will automatically apply in this case.

Even in its reduced form, the New News Corp still dwarfs its Australian rivals in terms of size. The company closed yesterday with a market cap of a little over $9 billion. That leaves it over four times larger than Seven West Media (ASX: SWM) at $2.1 billion. While Fairfax Media (ASX: FXJ) clocks in smaller still with a market cap of $1.2 billion. All three are struggling to find a business model that works in an age of online publishing.

Foolish takeaway

Shares of New News Corp are likely to continue to their wild ride until investors have had time to properly assess the company's fair value. Spin-offs can often present a lucrative opportunity for small investors and a share price leap of 15% is never easy to ignore. However, given the significant headwinds that the company faces, investors would be wise to tread carefully here.

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Motley Fool contributor Matt Joass does not own shares in any of the companies mentioned in this article.

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