ARKK, Growth Stocks & 2022’s Short Squeeze
Why are growth stocks seeing relentless selling?
Well, we found something.
It’s a short ARK Innovation ETF (ARKK) called SARK. There’s $150 million in this fund!
Growth stocks — such as Zoom, Teladoc, DocuSign — are on sale. But the growth is there. It doesn’t match up.
And it’s not sustainable.
In our opinion, disruptive innovation is NOT going anywhere. We’re going to be in for a pretty sharp rally in our growth stocks.
Stay Strong Hands and see our full take on the coming “short squeeze”:
Paul Mampilly: Hey Ian. How are you?
Ian Dyer: Doing well. How about you?
Paul: I am doing well. It’s time for the IanCast. This week I figure we will follow the format from the last few weeks. Let’s cover the stock market and the crypto market in general rather than getting too specific. I think that’s what people would want us to cover.
Ian: I agree.
What’s Going On With SARK?
Paul: Let’s get going here. I texted you right before the IanCast. We have been searching for why our stocks — America 2.0, Fourth Industrial Revolution, growth stocks — are seemingly under the pump daily. It does seem like there’s relentless selling.
I have watched a number of Cathie Wood videos. She theorized there are algorithms using playbooks that are using what happened in 1999/2000 to develop a short book and sell things. Other people are maybe using the March 2020 crash, looking at burn rates or something like that.
We actually found something much more direct. I mentioned it to you. There is actually now a short ARK Innovation ETF (ARKK). It goes under the ticker SARK. We are going to put this up. It will show you. The title says,
In other words, inverse ETFs are not going to give you a compounded return.
It’s a daily. Then we went and mapped out what the effect has been. It does look to be a one-to-one effect from the beginning of the SARK ETF and its effect on ARKK. It seems to be nearly a one-to-one correlation.
SARK is up nearly 40% and ARKK is down about 33%. It accounts for a number of things including bid and ask prices. What do you think of this?
Ian: The timing of that is definitely interesting and all that money flowing into SARK. Obviously, with a lot of people, it’s a popular trade to go against the America 2.0 growth stocks. They have become a vector for that. They are putting money directly against ARKK.
At the same time, I noticed the short interest against ARKK has gone up. It was up more than 16% recently. I think between that and this new ETF that’s actively going against ARKK, it’s gearing up for a giant short squeeze. That could have a bad effect on SARK.
It’s definitely put downward pressure on ARKK. ARKK is down more than 30% in just over two months. It’s been a crazy drop.
Paul: Before we go there, let’s keep going on SARK. It’s actually extraordinary. SARK lists on November 9, 2021.
It does look like, per the chart, it begins trading on November 10. Since then it has accumulated an astonishing $150 million in assets.
So, $75 million per month is flowing into this.
I can tell you if you reverse the effect and you had $150 million flowing into ARKK we would be seeing the reverse of this. We would be seeing a significant rally in ARKK and the underlying stocks. The top stocks are Tesla, Square, Teladoc, Zoom. We know these companies because they are in the Profits Unlimited portfolio and we are being hammered daily as a result of it.
Ian, $150 million. That’s the net assets number. However, the key is to go look at that listing date. This has happened in two months. In other words, people have piled in hand over fist thinking this is a sure bet. I can tell you having gone and tried to raise money for mutual funds and hedge funds, $150 million for two months has never happened to me.
You could be handing out the world’s most popular drugs and you would struggle to generate $150 million in sales. I suppose that initial write up gets to the heart of this. People genuinely think we are going to revert to when? How far are we turning the clock back when the pandemic ends?
Are we going back to 1980? 1990? Where are we going?
Are Turning The Clock Back After The Pandemic?
Ian: I think things are still full steam ahead. If you look at what these companies have been saying in earnings calls and things like that, they are still experiencing rapid growth. Everyone wants to get in on the newest and most efficient technology. These companies, fundamentally, haven’t changed at all.
What has changed is the price of their stock, despite their growth. I have seen a lot of cases where the stock is down more than 50% but they have increased their sales by 50% since a year ago. In that case, the valuations of these stocks have gotten crushed.
Like I said, the price-to-sales valuation — which is a common way to value a growth stock — for 2022 is a fraction of what Microsoft and Apple are valued at. There’s been a total reversal in what deserves a high price-to-sales multiple. All this money is flowing into these mega-cap tech stocks.
It’s totally discounting the growth stocks where the real growth still is and will be for the near future.
Paul: And also, $150 million going directly to short ARKK. The impact on this is that if $150 million is going into this ETF, it’s definitely being hedged by people going short individual stocks, meaning the market makers have to hedge this book. They can’t just have this short and be naked.
They have to go out there, which is going to flow into puts, short positions and eventually as things reverse you also have the opposite effect that can come. That acts as this massive impact. As money wants to stream out, you have short covering, puts people want to close out as the market figures out that’s what’s going on.
They will look to crush those positions. The markets can sense when people want to get out of a overbought, one-way position where everyone is on one side.
If you look at this year, this is the chart that begins with December 31, 2021, comparing the S&P 500 cap weighted, equal weighted, Nasdaq Composite, ARKK and the Russell 2000.
ARKK is down 15% already for 2022. We are only a few days into this year. The worst-performing index is the Nasdaq Composite which is down about 5%. The effect of people piling into short disruption stocks through ARKK, the impact is significant on the market.
Ian: That short interest on ARKK at 16% is the highest I have ever seen for an ETF. It’s insane. Some of the underlying stocks have higher short interest than that. Again, this is setting up for a major short squeeze which is going to cause an unwinding of positions in SARK and panic selling there.
The fund managers to that are going to have to cover their positions too. When this reverses we could be in for a sharp rise.
Paul: Again, going to show what the impact has been, at one point in time since the COVID crash ARKK was up more than 200%.
It is now after this right in line with the S&P 500. In fact, it’s now underperforming the S&P 500 equal weighted.
Just so we make sure the right chart is up, ARKK is now up only 113% versus S&P 500 which is up 113%. S&P 500 equal weighted is up 131%. Nasdaq composite, 199%. The Russell 2000 is up 119%. So it’s now actually a laggard relative to all those indices.
All these slow-growth companies have now been bid up. We’re going to give people a flavor of the growth our companies have. You would think relative to companies that have secular growth declines — yes on a one-year basis some of them are showing growth.
But they are in secular decline. It’s given up all that.
Your Questions Answered About ARKK ETF!
The reason I bring that up is if you read the description of the short ARKK ETF, it asks these questions:
“Do you think that disruptive innovation is overbought?”
After recounting to you where ARKK is relative to the S&P 500, S&P 500 equal weighted, Nasdaq Composite and Russell 2000, could you say that the disruptive innovation is overbought?
Ian: I am going to say a big no on that one.
Paul: From a valuation basis they trade on a price-to-sales that’s comparable to far slower-growing companies. We’ve shown you the performance basis. What do you think about the second question?
“Do you believe that ultra-high growth valuations have reached uncomfortably lofty levels?”
Ian: I am going to say no to that one too.
Paul: Maybe you could have argued that at somewhere near the top in February. I went and did a survey, on average they are trading between 8 and 10 times sales while having growth that is 4, 5, 6 times the growth you might get from the kinds of companies they are referring to.
What about this one?
“Does the bull thesis for transformational industries such as next gen internet, electric vehicles, genomics and fintech seem stretched?”
Ian: No. In fact, I’d say the opposite. Just looking at what these companies are saying in quarterly earnings, business is booming more than ever.
Paul: I am going to go with a no as well. Let’s go through three companies which are in ARKK and, full disclosure, also in the Profits Unlimited model portfolio.
Zoom Is Still Zooming!
Let’s go through Zoom’s quarterly sales growth since they went public.
This is the string of growth.
Some of it is pre-pandemic, some of it is post-pandemic. You can see when the big spike arrives post-pandemic. April 30, 2019, 103%. Followed by July 2019, 95.67%. October 2019, 84.85%. January 2020, 77.93%. First pandemic quarter, 169%. So a big jump.
Then we get some massive jumps as the world goes online. July 2020, 355%. October 2020, 366%. January 2021, which represents the peak of the post-pandemic quarters in terms of growth rate, 368%. That’s followed by a slowdown. But a slowdown in this case is 191.4%.
Followed by July 2021, 53.95%. October 2021, 35%. The way this Zoom stock has crashed, collapse, whatever your word is, you would think in the last two or three quarters it had given up all the growth it experienced in 2020.
When in fact, after growing for three quarters in a row more than 300% — something I don’t think I’ve seen in a company ever — it continued to grow at 30-50%. It now trades as if it might go bankrupt or maybe it’s growing 3-5% a year.
Ian: If you look at a stock chart for Zoom, it’s trading for the same prices it did in March 2020. It’s given up all its gains since the pandemic as if the company hasn’t had any growth. It’s not reflecting that it had almost a year with more than 300% growth, which is just insane to me.
Like you said, it’s like the company is going to fail. I don’t see Zoom going away anytime soon. I think it’s going to grow stronger and stronger. It might not have 100% year-over-year growth, but 30-50% is totally within reason. It’s crazy how the stock has acted, especially recently.
Despite a lot of people going back to work, Zoom is still one of the highest-growth stocks in this sector. I think it’s definitely way over extended its selling. It’s the opposite of what they are saying.
Paul: They are offering the idea, to go back to their write up, Zoom is definitely not overbought if you look at the chart. They certainly don’t have ultra-high growth stock valuations. The bull thesis is very much in place. We are on Zoom now. Pretty much a lot of digital life happens on Zoom.
Teladoc Is Still Growing Strong!
The growth continues unabated as seen by evidence. Let’s go to a company that is similar. I will not read all the growth numbers again. This one is for Teladoc.
Just to do the comparison, in the pandemic quarters we had growth of 85%, 109%, 145%, 150%. It’s continued to grow at 108% and then 80%. Yet, you look at a stock chart of Teladoc and you would never think that is the actual progression of growth.
Ian: It’s actually trading for a lower price than it was back in March 2020. Again, the price does not reflect that growth or the future growth of Teladoc whatsoever.
Paul: We have a company reporting four consecutive quarters of 100% sales growth, followed by an 80% slowdown. If you look at Teladoc stock you would think it’s going out of business or seeing negative numbers. They are growing at a fast rate, just not quite as fast as that quarter post-COVID.
Ian: It’s not like sales estimates for 2023 or 2023 have gone down. They have actually gone up a lot. It’s been a positive time for their business. I think the stock will reflect that in the near future. It can’t go on forever like this.
Dirt Cheap DocuSign Still Growing!
Paul: One last one. I am not going to read everything. This one is DocuSign.
Last quarter after they reported, the stock got cut in half essentially. This is a company during COVID that had nearly four straight quarters of 50%+ growth. Go look at that stock. It has gotten crushed.
It trades for a cheaper price than a lot of stocks. Price-to-sales forward, it’s actually dirt cheap.
Ian: Teladoc is trading at a lower price-to-sales than Apple and Microsoft. DocuSign, for 2022, 2023 and 2024, sales estimates have gone up several percent. They are not just growing at a high rate, they are predicted to grow at an even higher rate than they expected a year ago.
The fundamentals are not at all in line with what the price is doing.
Paul: In last week’s video I was accused of not using fundamentals. I answered by saying we are aware of what the fundamentals are. We are certainly very aware of what our fundamentals are, which is that we are very focused on sales growth.
It would be hard for people to argue and say that these companies that have growth rates that are multiples of the average company today. The disruption thesis for this is in place and the growth shows that. Teladoc is not going to go to -20% growth tomorrow.
If anything, because of omicron my guess is there would be even more use of it.
Ian: I would agree. The go-to seems to be to do a telemedicine appointment. They are saying quarter after quarter, “Our business is not slowing down at all.” I would agree.
Paul: The same thing you can say for DocuSign. The real estate market is one small part of DocuSign’s business. Real estate is not slowing down. My guess is closings all use DocuSign.
Ian: Instead of meeting with the realtor or lawyers, more people say, “Why would I do all that when I can do this at home?” I’ve done it a lot, for years. It’s so much easier. It’s another thing where their business model provides way more efficient technology than we are used to.
Anyone who agrees is going to take that and use that as their business.
Paul: How are they viewing these homes? Oftentimes through Zoom. We can do this for Zillow and company after company. I definitely get it. People dislike violent volatility. However, there is a fund that is actively going and shorting ARKK which has a significant number of our holdings.
Meanwhile, our businesses are growing hand over fist. From all my experience I can tell you this is unsustainable and at some point in time it will flip. You will have an equally violent rally that goes up in the other direction.
I am going to say the thing to do is, yes, stay strong hands. There’s going to be a violent rally in the other direction.
Ian: It’s just like at the peak last February. It would have made no sense to people to sell because they had made so much money. It’s equally strange to say to buy and hold at this point because the emotion is fear and panic rather than euphoria.
Just judging that from a behavioral standpoint, if you are buying and holding you are doing what a lot of people aren’t. Generally, especially in this case where a lot of fundamentals and everything going on with these business models don’t match the stock.
That’s the thing to be doing right now. Go against the grain. Go against the crowd.
Paul: I agree. In hindsight, would it have made sense to sell everything and buy it back today? Yes, there’s no question. However, we did not have that hindsight and we were not brilliant enough to know that. However, we are sensible enough to be able to go and see there is a catalyst for the straight line decline since November.
It’s the initiation of this SARK that has seen massive amounts of money come in and is directly shorting ARKK and its various components. That effect is something other people are going to see. At some point in time, people will take the other side of this.
They will start to buy these stocks and bid them up to squeeze the short side. Now, the shoe will be on the other foot. You are going to have a short squeeze of sizable proportions. These stocks on a daily liquidity basis, especially at these prices, $150 million is a lot to go in over two months.
Ian: Then as we went into last week, the whole fear over rising rates is way overpriced in the market at this point. Inflation fears are way overdone. That’s been a narrative that has probably run a lot of money into SARK. I don’t think it will last forever. We talked a lot about that last week.
What’s Going On IN The Options Market?
Paul: Yea, we covered that. You can check our video out from last week. Let’s talk about what you are seeing in the option markets in terms of the demand for call options. We took some questions on that last week. What are we seeing there?
Ian: Demand from a week ago has been strong. If you look at the stocks you wouldn’t think so, but a decent number of stocks on my watchlist are seeing demand for call options. Not just that, but people are bidding the price up where they are putting in market orders rather than trying to buy lower.
People are happy to buy at these prices for call options. That’s heading into earnings season so I think there is some positive sentiment behind the scenes in the options market that’s not being reflected in the stocks. I think you are seeing a pre-earnings selloff in the stocks to front run the fear that this quarter is going to be bad.
I don’t see this quarter being bad at all from a results perspective where these companies report solid growth once again. I don’t think there’s going to be a bunch of gaps down in these prices that we saw in the prior quarters. That’s what I’m seeing in the options market at this point.
Paul: I can lay out a case from just talking during this IanCast for how Zoom is likely to have seen higher usage and, as a result, higher revenue than anticipated. Same thing for DocuSign and Teladoc. I can do that for a number of other companies.
We are seeing some incipient signs that there is short covering going on. For example, I noticed Beyond Meat is up today. This is a stock that has been relentlessly shorted and it’s a stock in the ARKK ETF.
Ian: It’s the same thing with all these stocks. Earnings is coming up for banks. Who knows what they will say about rates. I think the narrative is going to slow down. It’s overhyped at this point. That’s going to be good for our stocks too. I expect the call data to get more and more bullish over the next couple of weeks until a lot of stocks start reporting.
Should You Hold Your American 2.0 Stocks?
Paul: One last thing before we shift to crypto. I did my Tuesday video on the amount of shadow inventory piling up around the ports in the United States. On Twitter I put up two charts showing inventories and the cost of inventories. Normally at this time of year we would see inventory start to go down post-Christmas.
Instead, we are seeing inventories continue to lift. Not only that, these are high-priced inventories. People are paying up to have triple and quadruple ordered. We are laying out a scenario where we are going to have over inventory by a factor of 2 or 3 that is going to take some time to work out.
Ian: With all that over supply prices are going to come down and inflation will cool off. I have seen China is worried about over supply of oil, steel and other commodities. I think there is going to be a snapback in these commodities as well as consumer goods.
The prices will have the reverse effect of what they have had over the past year or so.
Paul: One of the things that this kind of data has made us do is I sold two of our oldest and most profitable positions, taking over 700% gains in STMicroelectronics and AMD. I got some number of inquiries — some polite, some not so polite — as to whether that made sense.
You and I have had this conversation. One of the other stories is this chip shortage. You have been texting me and saying it’s 70-80% priced in to these stocks that have been ripping for months and months now.
Ian: The chip shortage narrative has been strong for a at least a year. I think a lot of it is priced in these stocks. If you just look at the past five or six years, semiconductor stocks are up an insane amount. I think a lot of people are in these stocks.
When there’s a supply demand imbalance and you have too many buyers in the stocks, there’s nobody left to buy. I feel like we are getting toward that point in semiconductors. Not to say they are never going to make another new high, it’s just that I feel like we’re nearing the end of that trade.
Paul: There are mini cycles in semis, even within the context of a much larger bull market. You could have a period for a few years where the number of sellers overwhelm the number of buyers. They struggle to make new highs and we could make better money by being in other areas of the market.
That’s the judgment I have made for AMD and STMicroelectronics. While there probably is a higher high somewhere out there, I feel given these trades have been around for a while — we’ve been in STMicroelectronics since day one of Profits Unlimited, June 1, 2016.
700%, if we gave up half of that, people would be pretty sore. We’ve taken our gains and we are happy with that. I have theorized that two of the places we want to go, which are being crushed today, is genomics, 3D printing and small cap in general.
Ian: I agree. A lot of the small cap has been wiped out 70% or more over the past year. ARKG is ARK Invests genomic fund. That has been hit almost 60% at this point. The companies in there are still fundamentally strong. I agree this is going to be one of the sectors that leads the next leg up.
In general, biotech hasn’t had a bull market in a while. The bull market for biotech ended in 2015. Since then, there have been pockets of strength but no real demand across the sector.
Paul: We have seen single-stock winners like Moderna, but we haven’t seen a bull market that carries all the stocks up. We have not seen that in biotech for five or six years. Bottom line, it sounds like we are making excuses. We still believe in innovation stocks.
We believe in disruption. We believe in America 2.0. We think holding through and coming out on the other side is going to be worth it. We know it’s unpleasant and difficult. I am still bullish, optimistic, positive — BOP. I would tell you to stay strong hands.
How Are The Cryptos Holding Up?
Let’s move to crypto. Big news today is that Tonga is setting up to be country number two to adopt Bitcoin (BTC) as legal tender.
Ian: Honestly, that one was not on my radar, but it’s still great news. It’s good to see another country doing this.
Paul: People will ask, “Why didn’t BTC jump to $250,000 immediately?” You know that’s the expectation. People think stocks and any investment should just pop on news.
Ian: Often it’s the opposite. There is buy the rumor, sell the news. I don’t think there was much of a rumor around this one though. I think something else that’s going on with this is El Salvador’s BTC bond issuance that’s scheduled for later this quarter.
I think between that and the Tonga news we could actually see a big rally in BTC. I think the bond issuance is going to shock a lot of people with how much demand there is. They are probably going to get more than they asked for. Just like Michael Saylor and MicroStrategy.
Every time they raised money it seemed they got more money than they asked for because there is such strong demand for BTC out there. Between those two things, I think there is a catalyst there not many people expected. I think that will have a positive effect on BTC.
Paul: What else is going on in the crypto market?
Ian: I think that’s the main thing. Most of BTC is being held by long-term holders — more than 70%. It’s just this short-term noise we are seeing. There’s a lot of fear and pessimism around BTC. There’s never a set timetable for that to be resolved.
I do feel like the bottom is either near or in. Even if we bounce around these lower prices for a while we are seeing strength in some alt coins. Overall, I am still bullish on BTC and crypto overall. We just need the buyers to come back in.
When they do, it will make a huge rally because the supply is so low. It’s an illiquid market that can be moved easily with high volume.
Paul: Are you still of the view of that DeFi blue trade? It does seem like those are not making new lows even with BTC dumps. Are you still thinking that’s one or maybe one of the main beneficiaries of the next run that happens in crypto?
Ian: Yes. I think all those DeFi blue chips that were laggards in 2021 because of the hype around them in Q4 2020 a lot of them went parabolic and sat back last year. I think there is going to be a return to those coins this year. We are going to see huge gains in those.
Of course the infrastructure ones didn’t do much last year. I think they are going to be one of the big beneficiaries as well.
Paul: We will end this IanCast on that. We are BOP on our stocks, America 2.0 stocks, innovation, whatever you want to call it. I know people may think, “Paul, you just come on and say strong hands and BOP,” as I was criticized last week. Nonetheless, that’s the path to big money.
You have to hold through volatility to come out on the other side. What’s happening as this unfolds is that people are selling. What they are doing is getting further and further back in line. They are persuading themselves of a bearish, pessimistic, negative outlook when you can look at the companies, the outlook and the growth.
Nothing has changed. The prices have moved down, but nothing has changed. I am still BOP. I will say to be strong hands. Ian, you say goodbye first and I will wave everyone goodbye last.
Ian: Thank you so much for watching. We will be back next week. Until then, have a great weekend and Happy Friday.
Paul: This is Paul saying bye.
Editor, Crypto Flash Trader