TradeSmith Snippets: Microsoft’s 10% Dividend Increase, What to Make of Real Estate Stocks, and What Our Tools Say about the Two Stocks Carl Icahn Says to Buy
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Along with my friend and colleague Senior Analyst Mike Burnick, I’ve been stressing the importance of owning what Mike calls “Pay Me Now” stocks — companies generating revenue in the here and now and passing that income on to their loyal shareholders as dividend payouts.
In our first snippet, our team analyzes what to make of Microsoft Inc. (MSFT) as it plans to hike its dividend payout by 10%.
For the housing market, I sent a warning in May that trouble was brewing. With mortgage rates jumping to 41-year highs, many folks are getting priced out of buying a home.
Our second snippet will show what our Health Indicator is saying about popular homebuilding stocks.
Finally, billionaire Carl Icahn said that the “worst is yet to come” at an investing event on Sept. 21.
Pressing him for what he would invest in, an audience member asked during a Q&A session, “I’m just curious what stocks look cheap and viable right now.”
In our third snippet, we’ll share the stocks Icahn picked and run them through our TradeSmith tools.
I’ll let the team take it away from here.
Enjoy your Monday — Keith Kaplan, CEO, TradeSmith
Snippet No. 1: Microsoft Shares the Wealth
OverviewMicrosoft is increasing its dividend payout by 10% from $0.62 per share to $0.68 per share.
The Breakdown
For shareholders of record on Nov. 17, the increased dividend will be paid out on Dec. 8.
This is considered a positive sign for the company’s forward-looking results, as it wouldn’t increase its dividend if it expected a significant decline in revenue in the immediate future.
It would only increase its dividend if it plans to maintain the higher payout.
The TradeSmith Takeaway
As MSFT’s dividend yield is only 1.04%, this increase in the dividend payout alone isn’t a reason to buy MSFT.
Putting it through the ringer, MSFT is in our Red Zone and in a downtrend, and with a Volatility Quotient of 24.26%, it’s considered a medium-risk investment.
Overall, our tools are saying Microsoft is not a “buy.”
But there is a potential profit opportunity forming that does involve Microsoft.
In our latest edition of Special-Situation Central, we shared Microsoft’s plan to buy Activision Blizzard Inc. (ATVI). Microsoft will pay $95 per share to ATVI shareholders to close the deal, which is more than a 25% premium from the stock’s price as of this writing.
Activision Blizzard shareholders approved of the deal in April, but the holdup is regulatory scrutiny over whether this will create anticompetitive business practices, like Microsoft only allowing Activision Blizzard games on its Xbox console.
ATVI CEO Bobby Kotick believes the deal will still close by 2023, and there’s another “conviction factor” behind owning Activision Blizzard stock: Warren Buffett’s Berkshire Hathaway Inc. (BRK.A) owns nearly 9% of the company.
You can find out more about that and the risks and rewards behind this arbitrage investing opportunity here.
Snippet No. 2: Mortgage Rates Have Their Biggest 12-Month Jump in 41 Years
OverviewOn Sept. 26, the average 30-year fixed mortgage rate jumped to 6.87%.
The Breakdown
At 6.87%, that 30-year fixed mortgage rate has the dubious honor of being the highest mortgage rate since 2002 AND being the biggest 12-month jump since 1981.
That interest rate prices some buyers out of the market and keeps them on the sidelines.
For example, someone who had a $500,000 mortgage for 30 years at a rate of 3.2% would need to pay $2,162 in monthly principal and interest. If they were to take out that same $500,000 mortgage now, that monthly payment would be $3,260.
The TradeSmith Takeaway
Back on May 13, Keith warned readers in Money Talks about the trouble that was brewing for the housing market.
His advice back then was to avoid homebuilder stocks and housing investments dependent on a strong housing market.
Our Health Indicator says to keep following that advice.
Just looking at five popular homebuilding stocks and companies that provide supplies to homebuilders, four are in the Red Zone and only one is in the Yellow Zone:
- Taylor Morrison Home Corp. (TMHC): Yellow Zone
- Legacy Housing Corp. (LEGH): Red Zone
- Cavco Industries Inc. (CVCO): Red Zone
- Builders FirstSource Inc. (BLDR): Red Zone
- NVR Inc. (NVR): Red Zone
Snippet No. 3: Two Stocks Carl Icahn Would Buy
OverviewWhen asked during an investing event where he sees good opportunities in the stock market, Icahn mentioned CVR Energy Inc. (CVI) and CVR Partners LP (UAN).
The Breakdown
CVR Energy operates in the petroleum refining and nitrogen fertilizer manufacturing industries, and CVR Partners was created by CVR Energy to own, operate, and grow its nitrogen fertilizer business.
CVR Energy subsidiaries own 37% of the common units of CVR Partners, and the manufacturing facilities of CVR Partners primarily produce urea ammonium nitrate and ammonia fertilizers. The war between Russia and Ukraine has disrupted fertilizer shipments, contributing to soaring fertilizer prices.
The gate price (the value of a product direct from a facility, not including the cost of selling or transportation) in Q2 for urea ammonium nitrate shot up 134% year-over-year, and the gate price for ammonia climbed 193%.
And Icahn put it succinctly during the event when he said, “You need fertilizer if you want to eat.”
The TradeSmith Takeaway
As the S&P 500 has dropped this year, CVR Energy and CVR Partners have provided positive returns that anyone would be happy with right now.
Analyzing each company with our tools, both are in the Green Zone, meaning that our system says that each is still a “buy.”
But keep in mind that both are considered risky investments, with CVI having a VQ of 54.77% and UAN having an even higher VQ of 80.34%.