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Value Manager Says of ARKK: Don’t Buy Now!

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What You Need to Know

  • Asset Manager Christopher Bloomstran argues that the Ark Innovation ETF is a bad buy, even at today's lows.
  • If its price keeps dropping, the fund will soon have underperformed both the S&P 500 and Berkshire Hathaway since its inception, he says.
  • From a liquidity perspective, ARK may be getting riskier, Bloomstran says.

In what Creative Planning’s Peter Mallouk calls an ”Excellent analysis. Devastating to many, unfortunately,” value asset manager Christopher Bloomstran, president and chief investment officer of Semper Augustus Investment Group, took to Twitter late Thursday to argue that it is a bad time to buy Cathie Wood’s ARK Innovation ETF (ARKK), despite the fund’s precarious drop in recent months, and its 61% fall since its peak in February 2021.

“Attention Kmart shoppers,” he tweeted. “Three more days like today and not only will ARKK have given back ALL of its 152.7% gain in 2020 but will have UNDERPERFORMED both Berkshire Hathaway and the S&P 500 from ARK’s inception in 2014.”

Bloomstran then listed several reasons investors should not consider the drop a buying opportunity.

“Since ARK penned its March 2021 ‘research’ report with a $3,000 price target on Tesla, ARK HAS SOLD TWO-THIRDS OF ITS TESLA SHARES,” he tweeted. “ARK Investment Mgt owned 5,785,523 shares of Tesla on 3/31/21. They owned 1,927,155 at year-end 2021, selling 51% of their shares in 4Q21 alone.”

Bloomstran continued: “From a liquidity perspective, ARK may be getting FAR riskier. They are selling several liquid holdings to purchase the more illiquid, with lower float. Despite net redemptions over the past year, ARK has added to or initiated new positions in 22 of their 30 largest holdings.”

He also noted that “Of ARK’s top 30 holdings, they own more than 5% of outstanding shares in half of the companies and more than 10% in 8 of the 30. Ownership of the companies’ float is even greater. Of companies with more than 0.5% portfolio weights, complete sales were in big, liquid names.”

And despite claims by CEO Cathie Wood that the ETF is now a “deep value fund,” Morningstar analysis shows differently, noting that many of her holdings are now deeply undervalued. “So is ARKK now a value fund? Or is it still a growth fund who investments have just done poorly?” author Katherine Lynch asks. The answer: “It’s still very much a growth fund.”

Bloomstran noted that ARKK’s issues include lower multiples: “ARKK shares peaked at $156.58 on February 12, 2021. At $63.26 they are down 59.6%. For retail investors thinking about a blue light special, approach with caution. At the peak the ARKK portfolio traded for more than 15 times sales. Today the multiple is 6.5 to sales.

“From ARKK’s 2014 inception through year-end 2019, the portfolio traded between 3 and 5 times sales. To return to the previous range implies a further 23% to 54% decline from today’s close. The NASDAQ didn’t complete its decline from the 2000 peak until it had lost 80%.”

“While the multiple to sales is clearly much lower than a year ago, suggesting relatively better valuation, ongoing concentration in less liquid holdings where ARK owns significant percentages of outstanding shares may make investing today even riskier.”

He notes that if withdrawals pick up, “this could be a bloodbath.” He adds: “Given that ARKK is now 3 days away (at today’s pace) from underperforming both Berkshire and the S&P 500 since inception, given the staggering dollar losses for the average ARK investor, tread carefully with falling knives.

“It is unconscionable for a manager to suggest they ‘can’ or ‘may’ earn 40% per year over five years. Simultaneously selling 2/3ds of the largest, most liquid holding, having suggested a price target implying a $3 trillion valuation? Another Tesla report coming this month?”

He concluded: “So much abuse of the retail investor late in the bull market. It’s a shame so many were sucked into the pump and impossible to deliver on promises. Excesses are unwinding, but as we saw from 2000 to 2002, the ultimate washout will likely take more time and inflict far more pain.”