AOL declines in first day of trading, Time Warner gains

It was Independence Day for AOL (AOL) on Thursday as the company was formally spun off from Time Warner (TWX), but the stock's debut on the New York Stock Exchange was something less than fireworks.

Shares in AOL -- DailyFinance's parent company -- spent almost the entire session in the red, but finished down just 0.6%, or 15 cents a share, at $23.52. Time Warner, meanwhile, gained 4.3%, or $1.24 a share, to close at $30.45, helped by positive analysts reports from BMO Capital Markets and Collins Stewart, among other brokerages.

As for AOL, some of the selling pressure likely came from funds with minimum market capitalization or dividend requirements. After all, AOL and former parent Time Warner are stocks with very different profiles. With a market value of $2.5 billion, AOL is a mid-cap stock, meaning large-cap funds that owned Time Warner and now own AOL through the spin off would be forced to pare their holdings. Meanwhile, equity income funds that only hold dividend stocks would have to get out of their positions, too, since AOL doesn't pay a dividend.

Additionally, Standard & Poor's included AOL in its mid-cap index rather than the S&P 500 ($INX), meaning any fund indexed to the S&P (and there are lots of them) would also have to unwind its holdings.

Initial Wall Street coverage of AOL has been light and mixed. Morningstar analyst Larry Witt put AOL's fair value at $29, making the implied upside about 25% in the next 12 months or so. Ben Schachter, an analyst at Broadpoint AMTech, called shares a hold at his $25 price target, while Miller Tabak analyst David Joyce initiated AOL at buy with a target price of $32. Ross Sandler of RBC Capital set a $27 price target with a sector perform rating (hold, essentially.)

In late November, Barclays Capital analyst Douglas Anmuth didn't issue a price target or rating for AOL's stock, but said it was fairly valued at $35 to $39.


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