TradeSmith Snippets for December 12

By TradeSmith Research Team

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Happy Monday; I’m glad you’re here with us for the newest issue of TradeSmith Snippets.

Today’s action-packed edition will cover:

  • The latest move from Microsoft Corp. (MSFT) to help win over the hearts of regulators and close its acquisition offer for Activision Blizzard Inc. (ATVI).
  • What the numbers from a luxury homebuilder are really saying about the housing market.
  • And one automaker’s plan to nearly double the amount of electric vehicle (EV) charging stations around the country on its own.
Of course, we aren’t just going to rehash the news.

We’re going to give you actionable insights that can help you make savvier investing decisions.

I’ll let the team take it away from here.

Enjoy your Monday — Keith Kaplan, CEO, TradeSmith

Snippet No. 1: Microsoft Plays Nice

Microsoft reached a 10-year deal with Nintendo (NTDOY) to allow the popular video game franchise Call of Duty on Nintendo consoles if Microsoft’s deal with Activision Blizzard Inc. (ATVI) closes.

The Breakdown
Microsoft appears to be playing the long game here and strategizing for a potential court case, as this move came before the Federal Trade Commission recently sued to block the acquisition.

One of the concerns of rival video game console companies was that if Microsoft were to acquire ATVI, it would make new releases, like Call of Duty, only available on Microsoft’s Xbox consoles.

This 10-year deal, along with a similar deal extended to Sony Group Corp. (SONY) with its PlayStation consoles, could help ease any anti-competitive business practice concerns.

The TradeSmith Takeaway
Microsoft president Brad Smith wrote a Dec. 5 op-ed in the Wall Street Journal saying that Sony was the biggest objector to Microsoft acquiring ATVI:

“Sony has emerged as the loudest objector. It’s as excited about this deal as Blockbuster was about the rise of Netflix. The main supposed potential anticompetitive risk Sony raises is that Microsoft would stop making Call of Duty available on the PlayStation. But that would be economically irrational. A vital part of Activision Blizzard’s Call of Duty revenue comes from PlayStation game sales. Given the popularity of cross-play, it would also be disastrous to the Call of Duty franchise and Xbox itself, alienating millions of gamers.”

The 10-year deal and the opinion piece set up Sony and regulators to seem unreasonable if the deal does not go through.

Smith went on:

“Some regulators worry that any big-tech acquisition will harm consumers and workers. But Microsoft committed in February to govern its new cloud-based game store by the pro-competition principles outlined in the app-store legislation pending in Congress. And in May we negotiated a precedent-setting agreement with the Communications Workers of America allowing workers to organize easily at studios, including Activision Blizzard. Blocking our acquisition would make the gaming industry less competitive and gamers worse off. Think about how much better it is to stream a movie from your couch than drive to Blockbuster. We want to bring the same sort of innovation to the videogame industry.”

In an issue from our popular series Special-Situation Central, we shared that there was an arbitrage opportunity that could net a double-digit profit if the deal closes.

Microsoft will pay $95 per share for ATVI, and ATVI is trading at $74.76 as of this writing, offering a potential 27% profit.

There is still risk in buying ATVI shares because there’s always a chance that the deal won’t go through, which is why ATVI is currently not trading closer to Microsoft’s offer of $95 per share. But in terms of taking a calculated risk, our Health Indicator has ATVI in the Green Zone, and our Volatility Quotient (VQ) says it has a medium-risk score of 22.68%.

So, even if the deal doesn’t close, the $95 offer can be seen as a sign that ATVI is currently undervalued, and our tools say Activision Blizzard has standalone value.

Snippet No. 2: Look Beyond Toll Brothers’ Revenue and Earnings Per Share

Shares of luxury homebuilder Toll Brothers Inc. (TOL) climbed more than 7% on Dec. 7 following its latest quarterly earnings report on Dec. 6.

The Breakdown
Toll Brothers reported revenue of $3.71 billion, which exceeded expectations of $3.21 billion, and it reported earnings per share (EPS) of $5.63, beating expectations of $3.96.

It also delivered 3,756 homes, more than the company’s original forecast of 3,250 to 3,500 homes.

But digging a little deeper reveals other stats that paint a truer picture of the trouble that’s been brewing in the housing market.

New contracts fell by 60% from the same period last year, and the dollar value of new orders declined by 56%.

Even more alarming is that 20.8% of new contracts for the quarter were cancelled, the company’s highest cancellation percentage since 2009.

The TradeSmith Takeaway
With the average 30-year mortgage rate at 6.52% as of this writing and high inflation eating away at hard-earned dollars, folks have been forced to sit on the sidelines and delay becoming new homeowners.

Plus, with concerns that a recession will arrive in 2023, people won’t be racing out to make big purchases.

So, even though the TOL stock price climbed 7% after beating earnings expectations, the 60% drop in new contracts and the highest contract cancellation rate since the Great Recession speaks volumes about the trouble in the housing market.

Our Health Indicator confirms that you shouldn’t rush in and buy shares of TOL, squarely placing the company in the Red Zone. Our VQ also labels the stock as high risk at 39.89%.

Of course, we don’t want to just leave you with a stock to avoid.

Senior Analyst Mike Burnick believes that we are headed toward a period of stagflation, where inflation remains high and economic growth slows.

Fortunately, he’s seen this before and has a road map for how to profit.

It involves buying small-cap stocks.

And we have three potential buys available to check out here.

Snippet No. 3: The Charger Takeover

General Motors Co. (GM) plans to install 40,000 EV chargers across the United States.

The Breakdown
GM plans to place these chargers in places where people may leave vehicles parked for several hours, such as shopping centers, sports arenas, and parks.

Most non-GM electric vehicle owners will also be able to use the chargers, including Tesla Inc. (TSLA) drivers.

There are currently 43,000 charging stations across the United States, so GM’s plans would almost double the amount of charging stations around the country.

The TradeSmith Takeaway
GM is going all-in on EVs, announcing in June that it is investing $6.6 billion in Michigan through 2024 to increase electric pickup-truck production and to build a new EV battery cell plant.

GM also wants to increase its North American production capacity to 1 million EVs by 2025.

EV sales in the United States passed a 5% tipping point in July, which signals we’re on the precipice of the mass adoption of electric vehicles.

While this means that there will be car manufacturers that can make you money, GM is not that company, as it’s currently in our Red Zone.

But what our team has focused on more are the profit opportunities that will propel mainstream adoption — the companies building the infrastructure needed to get more EVs on the road… like charging stations.

We have a full report on two such companies here.