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In TradeSmith Snippets for today, my team will be letting you know about Cathie Wood’s $68.25 million shopping spree, updating you on a spinoff profit opportunity, and detailing how one company may have hit a defining moment in its history.
Enjoy your Monday — Keith Kaplan, CEO, TradeSmith
Snippet No. 1: Cathie Wood Buys the DipOverview
Cathie Wood’s ARK Innovation ETF (ARKK) purchased 713,062 shares of Zoom Video Communications Inc. (ZM) this week.
In its earnings report on Aug. 22, Zoom announced revenue of $1.1 billion, which missed the company’s previous forecast range of $1.115 billion and $1.12 billion.
For the fiscal year, Zoom projects revenue will be between $4.385 billion and $4.395 billion, down from a previous forecast of revenue between $4.53 billion and $4.55 billion.
Opening at $98.20 the day of the earnings report, the price of ZM dropped by 13.89% to $84.56 at the start of the next trading day.
Wood, basing her investing philosophy on being in a deflationary environment, decided to buy the dip for ARK, and her ARK Next Generation ETF (ARKW) also bought 126,239 shares.
The TradeSmith Takeaway
While you may be hearing anecdotally about more folks returning to offices, a data collection project found that only 49% of workers who were asked to return full-time are showing up all five days of the workweek. And hybrid workforces aren’t going away, making Zoom a lasting fixture of everyday business in the post-pandemic world.
But Zoom has a growing list of competitors in Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT), Cisco Systems Inc. (CSCO), and other platforms that offer workplace communication tools.
And our tools are saying not to follow Wood’s lead.
Zoom has been in the Red Zone for the past 11 months, and with a Volatility Quotient of 50.44%, it poses sky-high risk.
For everything that Wood has done right as CEO of Ark Invest, she’s also made a few critical errors; you can find out how to avoid them here.
Snippet No. 2: Kellogg Names New Cereal CzarOverview
Ahead of its three-way spinoff in 2023, Kellogg Co. (K) announced who will run its North America Cereal business: Gary Pilnick.
Pilnick has been with Kellogg for 22 years, and he’s currently the company’s chief legal officer and vice chairman of corporate development.
He helped the company with the acquisition of Pringles in 2012, and he is credited with being a key architect of Kellogg’s 2018 “Deploy for Growth Strategy,” which involved consolidating product offerings and teams and investing in areas of growth to improve focus and sales.
That sounds like ideal experience for executing a successful spinoff.
The TradeSmith Takeaway
A spinoff is normally treated as a news event, and investors are left at a disadvantage when one happens, for three reasons:
- The company tends not to offer a lot of communication about the spinoff outside of an initial press release and a small mention in earnings reports that the spinoff is still on track.
- Index funds often can’t hold the new stock formed from a spinoff.
- Some analysts stop covering the company because they don’t know how to value it anymore.
Deloitte and Edge Consulting Group found that between 2000 and 2014, spinoff stocks generated a 22% return in the first 12 months of trading. That’s even better than the 14% return of the parent company that performed the spinoff.
While cereal may not be the most exciting business in the world, it still generated $2 billion in sales for Kellogg last year, and operating on its own could allow it to unlock even more value.
Kellogg is currently in our Green Zone, and we have a full report about its spinoff right here.
Snippet No. 3: Amazon Gets Plugged InOverview
Amazon.com Inc. (AMZN) just inked a hydrogen supply deal with Plug Power Inc. (PLUG), a company that produces, stores, and delivers green hydrogen energy.
To reach its goal of being net-zero carbon by 2040, Amazon has signed a deal with Plug Power to receive 10,950 tons of liquid green hydrogen starting in 2025.
The deal would allow 1,000 to 2,000 heavy-duty trucks to be fueled for a year, according to a Barron’s estimate.
Plug Power believes the deal will help it reach its revenue goal of $3 billion by 2025. As a reference point, the company generated $502 million in revenue in 2021.
The TradeSmith Takeaway
Over the last year, PLUG has proven to be able to wheel and deal, generating investments and new partnerships to help revenue growth.
- In January 2021, Plug Power announced a $1.5 billion investment from SK Group, South Korea’s second-largest conglomerate, which operates in the energy business.
- Also in January, Plug announced a joint venture with Renault – a French automobile maker — to promote hydrogen fuel cell electric vehicles.
- In February, Plug announced a 50-50 joint venture with Acciona — the largest 100% renewable power retailer in Spain — to provide multiple markets in Spain and Portugal with green hydrogen.
Right now, PLUG does have sky-high risk of 73.19%, but it’s also in our Green Zone as a “buy.”
We’ll have more on green hydrogen and the profit opportunities in the space in an upcoming issue of TradeSmith Daily, so be on the lookout for that to hit your inbox soon.