One of the market’s most celebrated money managers of the last seven years has been Cathie Wood. She founded her flagship fund ARK Innovation ETF (ARKK) in 2014. In 2020, five of her firm’s seven ETFs topped the industry.
But since the Fed announced its intentions to raise interest rates in November, ARKK has fallen off a cliff. The downtrend had been in place for most of 2021, when it topped out near $160 per share in February. However, the Fed’s plans to rate hikes fueled the selloff into overdrive. One year later, the fund has ticked under $60 per share.
Many investors question whether the fund’s run over the previous years was driven by the Fed’s easy-money policies. It’s clear that the tech market moved into extreme bubble territory. The number of unprofitable companies trading at 20 times revenue surged. They even surpassed the market capitalization levels seen during the Dot-Com Bubble.
Now, Wood has said that these valuation levels don’t matter. “Give us five years,” she recently told CNBC. “We’re running a deep value portfolio.” She’s convinced that her fund – over five years – will return a compound annual growth rate (CAGR) of 40%. That is an incredible prediction – one that would put her in rarified air as a manager and defy a significant amount of probability theory.
Over the last five years, just one in 15 stocks on the S&P 500 had a growth rate of this level. In a portfolio of 37 stocks, she’ll require a level of foreknowledge that is only found in the Bran Stark character on Game of Thrones; An ability not just to predict the future but also know it to near-perfection.
Wood has also said that she is running a “deep value” fund – a statement that offended me. “Value” is an anomaly – and one of the clearest signs that value has been discovered in the market is through the tracking of direct insider buying on Form 4 documents, which are filed to the SEC when an executive purchases or sells stock.
Executive insiders are exceptional at exploiting value and signaling that their stocks are undervalued. Typically, they buy the stock directly with their own money, and we see an aggregate gain in the stocks over time.
The 2016 study “Do Insiders Exploit Anomalies?” explains that insider buying signals are the most important tool in a trader’s ability to build conviction. The rule goes: If the insider signal is positive, but another anomaly signal tells you to sell it, listen to the insider signal and move onto the next trade. If the insider signal is negative, but another anomaly signal suggests you should buy the stock, listen to the insider signal.
Based on this – Wood should listen to the insiders. But as I explain in an article coming out in a few weeks for a national magazine – the insider signal for Wood’s Top 10 stocks in her ARK Funds ETF is negative. In fact, insiders have sold about $28 billion in their stock over the last 12 months… and directly purchased…zero.
Zero Insider Purchases
This is all according to data from SECFORM4.com. Out of the 37 stocks in the ETF as of Friday, there have been executives at just 8 companies making 13 purchases in the last 12 months. That poses a big question. If Wood sees such incredible value in the stocks that her fund owns right now… if these stocks will return 40% annually for five years as she predicts… Why aren’t the insiders – executives at the company – buying up the stock right now?
My conclusion is that these insiders still believe their stocks have further to fall… And that there’s still very little value in the tech market right now. Don’t try to catch a falling knife on this ETF. Instead, focus on the insiders at the companies owned in this ETF. If these executives aren’t buying their stocks yet, then neither should you. And honestly – neither should Cathie Wood.