TradeSmith Snippets: CVS Eyes a New Takeover Candidate, TSLA Splits on Wednesday, and WWE Smacks Down Expectations
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Today, we’re going to explore opportunities emerging from the headlines, including prescription drug retailer CVS’ ambition to be a bigger player in the health care industry, the implication of Tesla’s thee-way stock split, and how WWE delivered a knockout earnings report.
Snippet No. 1: SGFY’s “Strategic Alternative” Could Be a Strategic Investment for CVS
OverviewCVS Health Corp. (CVS) could make Signify Health Inc. (SGFY) an offer it can’t refuse.
The Breakdown
Signify Health is a part of the growing “at-home care” market, partnering with employers and health plans to provide services in people’s homes. The U.S. home health care market is expected to climb 62% in value, from $94 billion in 2022 to $153 billion, by 2029.
Signify went public in 2021, but a report from the Wall Street Journal said the company is looking at “strategic alternatives.”
That’s typically code for “we are putting ourselves up for sale.”
One of the companies that could be interested in acquiring Signify is CVS, as it currently provides home-based health services through kidney care and infusions.
CEO Karen Lynch also recently said that she is expecting to “enhance” the company’s home health services.
Acquiring Signify Health would fit into that plan.
The TradeSmith Takeaway
An analyst from investment bank UBS projects that a strategic buyer like CVS could make an offer between $23 and $39 per share.
If a deal closes at $39 per share, that would be nearly a 90% profit from where SGFY is trading as of this writing.
Both CVS and SGFY are in our Green Zone, so we can do a side-by-side comparison.
SGFY is the more speculative investment of the two, with a sky-high-risk Volatility Quotient (VQ) of 57%.
Volatility Quotient (VQ) Level Breakdown:
- Up to 15% = Low Risk
- 15%-30% = Medium Risk
- 30%-50% = High Risk
- 50% and above = Sky-High Risk
As for CVS, it’s a much larger company with more stability than Signify, a fact that’s reflected in its medium-risk VQ, and it pays out a dividend with a yield of about 2%.
Again, both companies are in the Green Zone, so how you view these opportunities will be based on your risk tolerance and whether you like to take long-term positions or are comfortable with the risk involved with a short-term profit opportunity.
Snippet No. 2: The Tesla “Dividend”
OverviewTesla Inc. (TSLA) plans a three-for-one stock split on Aug. 24.
The Breakdown
On Wednesday, Aug. 24, Telsa shareholders will receive a “dividend” of two extra TSLA shares.
On Aug. 25, the stock will trade at a third of what it did the day before, but that isn’t a reason to panic.
It may appear to the casual observer that the stock price has suddenly cratered, but the value of what shareholders hold remains the same.
They just have more shares.
The TradeSmith Takeaway
Splits can be a bet on investor psychology, as paying $300 per share is more appealing than paying $900 per share.
A lower price point can attract more retail investors, which increases trading volume and then can increase the price at which the stock trades.
One study found that since 1980, S&P 500 stocks that announced splits beat the index by 16 percentage points over the following 12 months.
TSLA is currently in our Green Zone, but it does come with a sky-high risk of 55%.
But we don’t want to leave the “Tesla isn’t for me” crowd empty-handed.
Most auto companies are in our Red Zone, but there is an ancillary opportunity in the Green Zone that Senior Analyst Mike Burnick loves: Allstate Corp. (ALL).
Allstate is the third-largest property-casualty insurer in the U.S., taking in over $50 billion in revenue last year, up 20.7% year-over-year.
The company also provides a wide range of life insurance and investment products to diversify its income stream.
Allstate collects premium income every single day of the year from insured customers, but it only has to pay out if and when there are claims.
In the meantime, it gets to invest all that premium income, known as “float,” to make even more money for the company and its shareholders around the clock.
ALL currently has a dividend yield of nearly 2.6%.
Snippet No. 3: Wrestling Rakes in Profits
OverviewWorld Wrestling Entertainment Inc. (WWE) threw expectations over the top rope, making itself an even more attractive takeover target.
The Breakdown
On Aug. 16, WWE reported that revenue in Q2 2022 increased 24% year-over-year, from $265 million to $328 million.
Net income also increased 67% year-over-year, from $29.2 million to $49 million.
The company also said that views of its WrestleMania, WrestleMania Backlash, and Hell in a Cell events reached all-time highs.
The TradeSmith Takeaway
Former WWE CEO Vince McMahon stepped down on July 22 amid allegations of misconduct, and an investigation was launched.
In the earnings report, it was shared that the investigation is “substantially complete.” There could still be issues that arise, as the company disclosed that it could receive subpoenas or enforcement inquiries in the future, but at least shareholders now know the status of the investigation.
As we shared in a new TradeSmith Daily feature, Special-Situation Central, with McMahon stepping down and the future of the company uncertain, companies like Netflix Inc. (NFLX), Amazon.com Inc. (AMZN), and Walt Disney Co. (DIS) could be salivating at a chance to make a bid for the WWE to bolster their content offerings.
You can access our full report on the WWE right here.