3 Catalysts to Fuel a Growth Stock Rally
Anti-ARKK? Not us.
Essentially the ARK Innovation ETF (NYSE: ARKK) is our America 2.0 ETF.
But right now, people are betting against it through SARK — an anti-innovation fund.
There are millions of dollars pushing into this fund. It shows me that the anti-growth-stock trade is crowded.
That only means one thing: There are plenty of buyers to fuel the rally later on.
We know it’s been a brutal few months. But you have to have a #BOP (bullish, optimistic, positive) mindset.
In order to get the rewards, you have to go through times like this.
Now is not the time to give in to the FUD (fear, uncertainty, doubt).
In fact, we see three catalysts that can turn this market around and back to growth stocks. Check it out:
Paul Mampilly: Good afternoon, Ian.
Ian Dyer: Hey Paul. How’s it going?
Paul: I should actually say good evening. It’s a gloomy day here in North Carolina. How is it up there in Maryland?
Ian: It was gloomy earlier, but the sun has come out a little bit. That’s nice to see because it was cold and rainy.
Paul: I have to ask and if I’m invading any privacy you can choose not to answer, do Charlotte and Betty like it when it’s cloudy or when it’s sunny outside?
Ian: They love the sunny weather and when it’s hot out. They could lay out in the heat all day and they hate the cold. It’s annoying to get them out in cold weather. During the summer they are out all day.
Paul: For those of you who don’t know, Charlotte and Betty are not Ian’s kids. Can I tell people?
Paul: They are two potbellied pigs that Ian has. You have had them how long?
Ian: Charlotte we have had for probably four years. Betty for two. It’s interesting.
Paul: I want to say that my kids, after seeing them, ask if they can have one. I don’t know, let’s just go up and see Ian. Small talk aside, the growth stock correction relentlessly continues, kinda taking crypto with it. Today we will continue our discussion from last week.
SARK The Anti-Innovation ETF!
We are going to cover this SARK anti-innovation ETF. They are short the ARKK ETF. I’ll give you an update on that and then we will cover an article. I don’t want to be completely insulting to this dude, but we are going to cover it.
Essentially, this article — after ARKK being down huge — says ARKK and all the stocks in it, which are pretty much our stocks, are no hopers. I think his article is so wrong. It’s just — I don’t even know. We’ll cover it and then you’ll see.
Then we’re going to respond to some of the questions that came from last week that asked for some additional analysis. They were good suggestions. I put together a chart for the three stocks we used to show there is value in our stocks, America 2.0 stocks, Fourth Industrial Revolution stocks.
Let’s start with a chart comparison comparing the Tuttle Capital Short Innovation ETF (SARK).
For those who did not tune in last week, this is an ETF that is short ARKK. The short fund has the ticker SARK. Since beginning their trading on November 10, the short fund is up 40% while ARKK is down 33%.
There were some comments last week suggesting the volume in SARK would have no impact on ARKK. I think people misunderstand the nature of how markets work. Prices are set on the margin. Somebody else commented on Twitter and said, “This SARK fund has $150 million. How would that impact something that has $20 billion or $30 billion in it?”
Ian: The SARK ETF doesn’t short individual shares of ARKK. It actually uses derivatives called swaps to do that. Whenever you’re using derivatives you are using leverage to take one side or the other of a certain asset, in this case it’s ARKK.
Similar things do this like leveraged ETFs. If you have seen a leveraged S&P 500 or Nasdaq ETF, they do the same kind of thing. This can have a relatively big effect on the underlying because they have to constantly rebalance. I believe that can have a magnified effect on the underlying asset.
Sometimes you will see, in this case Tuttle, is going to outperform in way where it’s up 40% and ARKK is down 33%. It can also go the other way. If ARKK ends up rallying, Tuttle is short through derivatives and they are going to have to cover. It’s going to have a magnified effect on the short squeeze in ARKK. That can drive ARKK up even more.
Paul: Before we get into this discussion even more, I am going to put up a description of this Tuttle Short Innovation ETF.
We read it last week so I won’t read it again. If you want our discussion in answering these question, watch last week’s video.
I wonder — and we have not investigated it and we have not found the answer — if this ETF holds swaps that they have been sold by Morgan Stanley or Goldman Sachs. If that is true that they have executed a swap transaction with one of these big investment banks that will write you a contract for anything, then they themselves go to hedge their position.
What’s Going ON With ARKK’s Portfolio?
They sell the position to someone else on the other side. Or if nobody wants all of the other side, they will hedge it by shorting the stocks themselves that comprise ARKK portfolio. They’ll use options, futures or some mix so as to be able to reasonably approximate the movement of ARKK on a daily basis to be able to mark that swap contract to the folks at Tuttle Capital Short Innovation day to day.
Ian: Right. And you can see in that chart we showed where SARK is up and ARKK is down. SARK went down from 48% to 40% and ARKK went up. The up move in ARKK wasn’t near the 8% SARK has fallen today. It can have a distorted effect.
I believe SARK is being inflated because ARKK is being heavily shorted. Like I said, that can result in a huge short squeeze that could benefit ARKK and the underlying growth stocks.
Paul: We also know this from running two options services. The option premium matters. To the extent the swaps are comprised of put options on ARKK, as people come and other people are looking to short ARKK using puts, they are bidding the option premium up on the puts.
So you would get a little bit of extra performance when ARKK is in decline. The other day it had a big move down and my guess is a lot of people piled in with put options on top of whatever is existing.
An update on how much money is in this. I was going to quiz you but I know you already looked. When we gave you an update last week there was about $150 million in it.
I took this number today, which would be as of last night, and there is now an amazing $234 million in this Tuttle Short Innovation ETF.
November 9 is the listing date, November 10 is the first day of trading. We are talking about in two months this has taken in nearly $125 million per month. That’s an extraordinary amount of money pushing in. It gets to the point we were making which is that that money is going and actively shorting the underlying stocks, ARKK itself, options on those stocks, options on ARKK.
That daily liquidity, they represent the daily liquidity on all these stocks in ARKK.
Ian: It shows me that the whole anti-innovation and anti-growth-stock trade is crowded. If this had gone public in late 2020 or early 2021, nobody would have wanted to buy it. There wouldn’t be $234 million in the fund within a few months.
That just shows that this trade is getting crowded. Everybody is against these stocks now. That only means one thing: There are plenty of buyers to fuel the rally later on.
Paul: I can tell you from having been in markets for a long time that usually by the time these funds appear it’s somewhere near the end of that move. In other words, just like Ian said, in February 2021 everyone was clamoring to buy ARKK. Now it’s about 10 months later and opinion has wildly reversed.
Ian: Opinion has gone down with the stock price. People loved it at $150, but they hate it at $80. That’s just how it works with the market. And now this huge short fund has appeared. It shows this trade is getting crowded.
Paul: Continuing in this vein, last week we presented three companies which are, full disclosure, in Profits Unlimited. They are all positions in the ARKK Innovation ETF. Folks wanted this comparison. I am going to read the numbers and you can do some interpretive analysis.
Zoom, Teladoc and DocuSign. Large positions for ARKK, large positions for us in Profits Unlimited. They have all been crushed. There is no need to give performance numbers. They are all down 50-60% over the last year. The very top bar is the stock price.
We can say it’s down huge. I think that covers it. The second panel shows you, while these stocks have gotten crushed, where their revenues have gone. I looked this up.
We presented all the revenues last week. Zoom has gone from $60 million in revenue to $3.9 billion, while it’s stock has gone down by 75-80%.
You can do that same kind of math for Teladoc and DocuSign. You can see they started from somewhere near zero.
Ian: It’s crazy. It’s reflected in their price-to-sales ratio. The valuations of these companies have gotten decimated and are now valued lower than some of the more mature companies in the market that are seeing not just declining growth, but almost no growth and on the verge of decline in sales.
Paul: Zoom, which is the one in purple, you can see its sales continue to go up.
Teladoc and DocuSign are similar. You would think if you look at panel number one, stock prices crashed, that it must be because it was a one-time pandemic effect for these stocks.
They must be showing negative sales growth. It was a one time thing and it’s done. They were all pandemic stocks, stay-at-home stocks. There’s no way they continued to grow on that large base. We looked up panel number three which projects quarterly year-over-year growth.
We need to explain this a little bit. Ian, you want to take this? It starts from a low point, goes to the pandemic high and then back to a low. You want to cover it?
Ian: Zoom had incredible growth of over 300% for a couple quarters. Nobody expected that to be sustained. When you have a company like Zoom that is already big, it’s not like they are going to grow 300% year-over-year for very long.
But they are still growing at 35%, which is amazing considering how their stock has done and also the fact it seems like a lot of people are already using Zoom, yet they can still grow by 35%. I don’t think that’s going to slow anytime soon. It might hover between 20-30%, which is still very high growth for such a big company.
Teladoc and DocuSign have not budged from their high points of growth. Teladoc is still growing 80% and DocuSign is still growing 42%. These are both companies that basically have monopolies in their field. Teladoc is convenient for medical appointments.
Everyone who started having telehealth appointments during the pandemic, it’s not like they are going to want to go to the doctor for an appointment they could just do over the phone. So that introduced a whole new way of doing things with doctor’s appointments. That’s going to stick around from what I’ve seen.
Then DocuSign is something that makes filling out paperwork more efficient for all sorts of things like refinancing mortgages to buying cars to buying a house — everything that has to do with paperwork. I think there’s no end in sight for the number of companies that are adopting these features.
I don’t think there’s any shortage of people who would want these features in their lives. I don’t think these growth rates are going to slow down too much. Zoom will probably be 20-30%, the other two will probably be higher than that. Either way, it’s amazing growth and way higher than most other companies this size in the market.
2022 Is Expected To Grow!
Paul: Talk to one additional thing which is quite powerful that would point to — and we’ve been wrong a lot in calling the bottom, so I am going to stay away from that trouble, but they are starting to anniversary past those very high pandemic exponential jumps in January.
We both know what matters to a lot of people is quarter-over-quarter comparison. Very soon they are going to be anniversarying lower comparisons. Talk about that effect because you are looking at trades for Rapid and Rebound Profit Trader where people come to bet the quarter.
That represents demand. Talk about how important that quarter-over-quarter comparison is. Then combine the fact we are anniversarying past the very big numbers where the comparisons are reasonable and into higher usage as a result of omicron, people staying home and not going to work, etc.
Ian: Like you said, most of the big numbers were in late 2020 and early 2021. At this point, we’re more than a year out from that. The year-over-year growth might actually go up. Either way, I think the growth is going to keep being consistently high.
The market looks like it was pricing in after 2021 there just wouldn’t be a need for these services anymore. I think when these companies report their earnings in the next month or so, the management is going to say 2022 is expected to be just as good a year.
It’s expected to grow, have high sales growth and things like that. The companies continue to improve, there’s continued demand for the products despite the pandemic situation easing a bit. People are still going to want these products and services. I think that’s going to surprise the market.
I think the move in 2021 was clearly way overdone. It was not just selling. Everybody was really critical of these companies. They thought they were fads. They were just waiting to short. It was a mixture of profit taking, loss taking by late buyers and active shorting by people who want to call these companies overvalued.
I think there will be a big switch in 2022 because people are going to realize these companies are relatively cheap now and are still growing very fast.
Paul: The last panel references something you have mentioned a few times. The price-to-sales ratios for these companies are now really low. Their stock prices have crashed. Their sales have soared.
Their future growth looks consistent at a high level in what we believe is going to be a growth-constrained economy where these America 1.0 companies will go back to showing single-digit, low-level growth. These stand out as consistent growers that are worthy of paying a premium.
Look at this price-to-sale ratio.
Zoom is now at 12.49, which for the kind of growth you are getting is cheap. Any growth investor would consider that cheap. 6.37 on Teladoc, which is ridiculous. Finally for DocuSign, it’s also in the 12s which is also cheap.
Cathie Wood tweeted saying she could see a scenario where ARKK could annualize at something like 40%. She was once again mocked for it. If you look at these multiples, this growth rate and what has happened with the stocks, I don’t think that’s such a high bar.
Ian: I agree. If you look at the price compared to 2022 expected sales, Zoom and DocuSign are both under 10 and Teladoc is under 5. That is comparable to Microsoft and Apple at this point in terms of their price-to-sales ratio, which is crazy because they have several times the growth.
It’s like these companies went from being seen as growth stocks to companies that are already maturing and a couple years out from the decline phase of their sales, which I don’t think they are even close to.
Another thing I have been watching is the level of their 2022 sales forecast to see if there is a big drop by analysts or the companies themselves. None of these companies have had a big change in their 2022 sales from a year ago. They said they were going to grow a lot in 2021 and 2022 and that hasn’t changed at all.
The only thing that has changed is the stock price. The growth is still there. When you have the stock price going down and the growth continuing to be high, you have a rapidly declining price-to-sales ratio. That’s exactly what we have been seeing.
I think the market is going to take this into account once they see 2022 and going forward are still going to be high-growth periods for these companies.
Paul: I agree. You have a few catalysts here to maybe turn this around. These stocks are cheap. Their anniversarying their lowest growth comparisons in 12 months. People who are piling to SARK and have sold these stocks are anticipating that when January comes and people start to announce results, they are expecting Zoom, Teladoc and DocuSign to say, “Our growth was all in the past.”
Ian: That’s essentially the point I was trying to make. I think the market is going to be shocked. We are going to see a mixture of short covering combined with people coming back into the market to buy these at low prices once they see the growth is still alive.
Paul: I won’t go into the macro situation about the over-inventorying that would drive interest rates lower, which would act as a fourth catalyst to push stocks up as well. We won’t cover that. I’ve done a video on that. Just check on our channel for that.
Let’s Look Into The Article!
Before we end on stocks and go to crypto, I saw this article in Fortune magazine. This article was so wrong in so many ways that I absolutely had to present it to you. People think just because something is published in Fortune or Forbes that these people are credible and know what they’re talking about.
I am going to read the headline: “Cathie Wood’s ARKK Portfolio Is Headed for a Shipwreck.” At least he has a poetic turn of phrase. “Plunging tech stocks aren’t even the worst of it.” I’m not sure what could be worse considering that’s what they’re invested in.
I guess they’re invested in crypto so maybe, but he doesn’t go into that. I’ll just read some of his more poetic language. I think it’s entertaining. Some people will come to troll me and say, “Paul, he’s been right. Since January 12 to now if you had gone with him you’d be up 10.”
Let’s give this a year. Let’s give this article a year and come back to it. We should calendar it to come back. It says,
That’s interesting. These are just companies. I didn’t know they were climbing Mount Everest..”
“The reason cited was a sudden fall in shares ARKK shares presented a matchless buying opportunity.” I want to say that the same holds true for our stocks. We are invested in the same things. We have a similar outlook on the world. We believe the same thing is going to unfold and there is going to be a massive surge that is going to have to last years to make up for how cheap these prices are.
According to this writer, In this interview.
This is the crux around which this writer has chosen to write and try to destroy the basis for growth stocks. He goes on to make a number of comparisons based on PE, earnings and profits. Here’s the problem, growth stocks are never valued based on earnings or profits.
They are always based on growth. Sales growth is what matters. It’s what people go out of their way for. It’s how you would have hit Google, Netflix, Tesla. Or in another time, Microsoft, Amazon — any of these. I don’t know what your reaction was. I asked you to read it before we came on.
Ian: Just that this is such traditional finance thinking. When I was in the CFA program this is how you are taught to think and when I was in college. If the company isn’t making a profit it’s worthless and you shouldn’t invest in it. I used to feel this way.
I remember in 2013 and 2014 I was in college looking at Tesla stock and thinking, “That doesn’t make any sense.” Then later on when I started looking into growth investing and growth stocks I realized it’s because they are looking at the companies with the wrong framework.
It’s about future growth. Even present growth and sales, but future growth in every aspect of the business. That’s what we look at. That’s what ARK looks at. That’s not what this article looks at or what the traditional financial media is looking at.
As you said, they would have missed Tesla, Google, Amazon, and all these companies because it wouldn’t have made any sense. They would have ridiculed the stocks as they go up and produce insane returns. Then they buy in near the top because they think the price-to-earnings ratio makes sense.
You are going to have the volatility of course in growth stocks. 2021 was an exception to that in that it was down way more than a normal year is going to look. I don’t think these downswings are common by any measure. The future growth for these companies is still there.
The ultimate growth thesis for buying these as growth stocks is still very much intact. Despite all this, and I know everyone is probably seeing the same things on CNBC and other financial media sites, it’s just not how growth stocks are measured by actual growth buyers.
Paul: I want to reiterate the reason we are using this article and analysis on the ARK Innovation Fund is because we are in parallel. We are living in the same world. Probably Motley Fool also does innovation investing. The three of us are on our own. We are pretty much the only folks who are all in on growth through innovation and solely focused on it.
Of course, we have gotten hammered in particularly the last three months. But folks, look at the companies. They are growing. These stocks are cheap. I want to read this last paragraph. Even though he means this sarcastically, I think this is a scenario our readers can actually experience.
This is the last paragraph.
No evidence is needed. No analysis is needed. No need to look at growth rates. He can just state it and it must be true. “More likely, ARKK is still so expensive and still so much the antithesis of the value sphere where the real deals reside.” I don’t know if I can continue to read this with a straight face.
“It will underperform that Nasdaq and other indices in the years ahead. Wood will probably be better remembered as a cultural phenomenon rather than a rebel who changed the game. She’s the new model for portfolio managers who talk directly to people. She’s good at doing things that are popular, but she’s also doing a disservice to investors.”
He continues with this skepticism.
Ian: It doesn’t sound popular to me. I don’t know.
Paul: She’s attracting $250 million worth of short interest.
Ian: Exactly. This is the thing, people see the losses on the bottom line, which is going to be any company that is setting out to capture a market that doesn’t exist yet or is in the very early stages. They have the foresight to see they have an amazing solution for something that isn’t in the market yet.
They are going to capture this growth while this product provides efficiency. Yeah, they don’t have profits now, but it’s a leap to say they can’t grow profits and it’s not even going to come close to happening. That’s ridiculous in my opinion. I am glad you screenshot the article.
It’s going to be fun to come back and look at in a while.
Paul: There’s a series of misunderstandings here. People seem to think you can create a company from scratch and it will be instantly profitable, especially a company at scale. A company at scale has to be put together over time.
Then as it turns out the opportunity is legitimate, they have to take all the money they have and put it back into the company.
Ian: It’s such early days for these kinds of services. We have never seen an explosion of innovation like we have now. At least not anytime recently where a company will come out and say they are providing telehealth services. A couple of years ago people said, “What is that? What does that mean?”
Now there’s been a total shift in that. Nobody wants to go to the doctor for anything they don’t have to. They can stay home and do it on their phone. That’s one example, but that extends into a lot of the companies that ARK Invest is in. They have that same business model of total innovation and something that hasn’t been done before.
But it provides such a great service that it’s going to be undeniable in being adopted in the future. I still think the years ahead look good for ARKK and this is going to be an absolute buying moment when you look back in a couple of years.
Paul: One of the other objections I noticed in the comments was, “I like to go to the doctor.” Any personal preference is valid, but go look up what the use rates are and look up the growth rates. While you may like that, clearly there is a large and growing market from something that is different from your personal preference.
Your personal preference doesn’t set the market. Understand, judging a company by your personal preference is not a meaningful way to look at a company. The last thing I want to mention is that we are spending a lot of time on this because we know it’s been a brutal two or three months.
While people may dislike me saying it, you have to have a positive mindset. You have to have a BOP mindset. This can happen. Cathie Wood has been with ARK — when did she start ARK?
Ian: I think 2015.
Paul: We started Profits Unlimited in 2016. We are in the same realm. It is going to happen sometimes when you might buy some stock at a high level. However, with the growth rate being what it is, at some point in time the prices even at the highs of 2021 are going to look cheap.
You are going to say, “If I just held on.” A 300% winner, 400%, 500%. No different than the analysis I did with Amber on STMicroelectronics where we saw 50% declines and still ended up making 700%. I am going to end the stock section by saying be strong hands, be BOP.
Having that BOP mindset is critical.
How Is The Crypto Market Doing?
Ian, I sense that Bitcoin (BTC) there is something going on. It’s showing in the Going Upness system what I would call business. There’s trading going on but it’s not making new lows and it’s not popping up new highs. What’s going on?
Ian: We’re in a sideways, boring period. We have been in these situations many times before. You see short coverings here and there where it goes up like it did today. It was above $43,000 for a little bit. Overall, the market is still flat. It seems dull in terms of volume.
To me, that’s a sign that things are about to go up. I don’t think it will be too long before we see a move. There’s still a lot of time left this year. I think 2022 is going to be an amazing year for crypto. For now, we have to keep being patient. I do believe that moment is going to come.
The supply-demand imbalance is going to show itself in the price at some point in the next few months at most. We just have to be patient. I do believe even if it goes down in the short term I am still bullish on it.
Paul: You have a price target of $350,000 and I have a price target of $250,000 by the end of June. At the very least it’s going to be exciting. There’s an old Wall Street saying: Never short a dull market. You mentioned the magic word: Volume.
That’s our coverage. We spent most of our time on stocks because we know that’s what you’re focused on and that’s what you’ve been hit hardest by. We still believe in it. We still believe you should stay in it. Ian, you get to say goodbye first and I will wave everyone goodbye next.
Ian: Everybody, thank you so much for watching. Have a great weekend, happy Friday and we will see you next time.
Paul: Strong hands. Be bullish, be optimistic, be positive. We’ll be back next week. Until then, this is Paul saying bye.
Editor, Crypto Flash Trader