TradeSmith Snippets: Arbitrage Investing Moves, a Self-Driving Car IPO, and What You Really Need to Know About META
Happy Tuesday, and welcome to the latest issue of TradeSmith Snippets.
We recently asked if you would like to hear more from us about analyzing arbitrage investing opportunities, and the answer was a resounding “Yes.”
We'll have one to share today.
In addition, we'll have what to make of a new self-driving car IPO, as well as why Mark Zuckerberg is plunking down so much real cash to build virtual worlds.
I'll let the team take it away from here.
Enjoy your Tuesday – Keith Kaplan, CEO, TradeSmith
But hurry, there's only a few days left to get in.
Snippet No. 1: Not All Arbitrage Is Created Equal
Overview
Bassett Furniture Industries Inc. (BSET) has rejected a takeover offer from CSC Generation Holdings, a firm that acquires retail businesses.
The Breakdown
Furniture stores have to worry about a slowing housing market, people pinching pennies and holding off on making furniture purchases for their current homes, high inflation, and logistic issues, but Bassett Furniture has a few advantages compared to its peers.
Its target customers are women between 35-55, with family earnings above $150,000: an income level that is less sensitive to higher prices.
Also, 75% of Bassett's products are manufactured domestically, which minimizes freight and ocean container expenses.
With 95 branded stores and over 700 independent store accounts, Bassett feels it's in a strong position to grow its operations and rejected CSC's offer of $21 per share, a 17.31% premium from where the stock is trading as of this writing.
The TradeSmith Takeaway
Before the unsolicited takeover offer, CSC acquired a 7.4% stake in Bassett in June, but it trimmed that down to 1.9% in just three weeks.
So, even though Bassett rejected the offer, considering their history, this may not be the last time CSC tries to acquire Bassett.
Bassett is in our Green Zone, which would make it a “buy,” but it's important to look at a few other factors if you would consider it purely as a potential arbitrage opportunity.
There's no guarantee that CSC would make another run at Bassett, making owning the company for the sole purpose of hoping it receives another acquisition offer a risky proposition. Plus, BSET is already considered a high-risk investment, according to its Volatility Quotient (VQ) level of 49.64%.
When it comes to looking for arbitrage opportunities, you have better options. One of those is with Activision Blizzard Inc. (ATVI).
Regulators still need to approve the deal, but Microsoft Corp. (MSFT) plans to buy ATVI for $95 per share, which would be a 30.26% premium from where the stock price is trading as of this writing.
ATVI is also in our Green Zone, and with a VQ level of 22.77%, its risk is less than half of Bassett's.
And unlike Bassett, Activision-Blizzard has an offer in hand.
We have a full report about the Microsoft and Activision-Blizzard situation available here.
Snippet No. 2: The Future Is Self-Driving and Electric
Overview
Mobileye Global Inc. (MBLY) began trading last Wednesday.
The Breakdown
Spun off from Intel Corp. (INTC), Mobileye makes software and hardware that can be deployed in self-driving cars and electric vehicles (EVs).
Mobileye is currently working with more than 50 automakers on advanced driver assistance systems, and the company said its tech has already been added to more than 117 million vehicles, with expectations of it being deployed in 266 million vehicles by 2030.
The self-driving car tech maker reported revenue of $854 million for the first six months of this year, with a net loss of $67 million.
The TradeSmith Takeaway
We love a good spin-off.
Deloitte and Edge Consulting Group found that between 2000 and 2014, spinoff stocks generated a 22% return in the first 12 months of trading.
But companies have held off going public because of the uncertain economic conditions, and so far in 2022, we've seen the fewest IPOs since 2016.
Also, we need two years of stock activity data before our Health Indicator can place a company in the Green, Yellow, or Red Zone. Depending on your risk tolerance, this may be a company to add to your watchlist so you can keep track of it from the sidelines.
But that doesn't mean there aren't opportunities in the here and now for you to check out. The EV industry may have just reached a “tipping point” for EVs going mainstream — opening doors for investors to make a lot of money.
And we do have companies that will help fuel the widespread use of EVs that have plenty of stock-performance data and are sitting in our Green Zone.
After Meta Platforms Inc. (META) released its latest earnings, shares tanked 20% in pre-market trading.
The Breakdown
Zuckerberg's company beat revenue expectations ($27.7 billion reported versus $27.4 billion expected), but it reported a $3.67 billion operating loss for its Reality Labs division, which produces virtual reality (VR) and augmented reality (AR) software and hardware.
Meta also announced that its spending for Reality Labs next year will be significantly higher.
The TradeSmith Takeaway
We don't have to remind you about tech stocks taking a beating this year, and our Health Indicator has META in the Red Zone.
But as much as Zuckerberg is being criticized for his metaverse investment that hasn't seen any immediate payoff, he still has a solid track record with the launch of Facebook and his acquisitions, which tells us he knows where and how the world will spend its time interacting.
Our tools might say this isn't a stock to invest in now, but after reading this, you'll see why META still deserves a spot on your watchlist as you wait for it to hit the Green Zone.
Have a great start to your week,
Team TradeSmith
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