Peter Hodson: These market or company events are notable for strangeness or even downright weirdness
A Stranger Things 4 fan event in New York. Photo by Yuki Iwamura/AFP via Getty Images fp The fourth season of Stranger Things just dropped on Netflix and it sometimes seems the market itself could be the topic of the next season.
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Let’s follow up on our upside down theme and take a look at five more market or company events that are notable for strangeness or even downright weirdness.
Ark Funds Ark Investment Management LLC runs a number of different exchange-traded funds (ETFs), all focused on high-growth strategies. Its ETFs did exceptionally well for a period of time, with many showing one-year returns of more than 100 per cent. But then everything changed. Its flagship fund, Ark Innovation ETF, is down 53 per cent in 2022. Five-year returns have gone from market beating to market lagging (still 10.8 per cent to the upside, however).
Article content But we are not here to criticize or praise Ark, or its high-profile founder, Cathie Wood. Others have more than taken care of that. Nope, the strange thing here is Wood’s recent forecasts. In recent interviews, she notes that “her strategies can deliver a 40-per-cent compound annual rate of return over the next five years.”
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Article content Ark founder Cathie Wood. Photo by Brendan McDermid/Reuters Now, we are all for the optimists of the world. We certainly need more. And, of course, markets rise over time, so optimists do tend to be the better investors. But a Canadian portfolio manager would get into so much trouble if they promised investors such high returns. The rules are very clear: managers cannot promise anything. But in the United States, we have a very high-profile manager not only predicting gains, but massive gains, and in a short period to boot.
We wish Wood well, but her strange behaviour seems to be more in tune with keeping Ark’s investors on board rather than a real prediction. We are just worried some naive investors might expect 40-per-cent returns, and we do not think that is at all reasonable.
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Article content The Twitter takeover Elon Musk wants to take over Twitter Inc. Or maybe he doesn’t. It’s hard to tell sometimes. But I am sure we are never going to get another corporate takeover quite like this one. Musk seems to be transacting his takeover through tweets. First, he ran a Twitter survey about what to do with the company, then announced his nine-per-cent position in the company, and is now trying to finagle a better price by questioning its bot accounts.
But think about it: when have you seen a takeover that was conducted via the target company itself? Twitter is, effectively, being taken over in a series of tweets on its own platform. The U.S. Securities and Exchange Commission has said it is “closely monitoring” the situation. Of course, Musk, as the richest guy in the world, kind of plays by his own rules. But it is a disservice to shareholders to conduct a takeover this way.
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Article content We know plenty of arbitrageurs who bought stock at US$49 thinking a US$54 bid was a nice way to make some money. The stock is now less than US$40. Musk faces a possible US$1-billion break fee if he walks away from the deal. But to him, that is essentially chump change.
Hey dude, when’s my margin call? MicroStrategy Inc. has been the poster child for corporations investing in bitcoin. The company and its chief executive firmly believe bitcoin is going to the moon, and have issued debt in order to load up on the cryptocurrency. The company owns about US$6 billion in bitcoin and its debt is now US$2.4 billion. And, in another example of strange, extreme forecasting, its CEO, as recently as May 20, was quoted as saying, “Bitcoin is the future of money, and I expect bitcoin is going into the millions.”
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Article content Today, bitcoin is around US$31,000. But that’s not the strange thing here. Nope, the strangeness comes from recently regulatory filings, where MicroStrategy notes that at a bitcoin price level of about US$21,000, it gets a margin call on its debt, and has to provide more collateral or sell some of its holdings. This filing was a regulatory requirement, but it provides naysayers and short sellers with an awful lot of firepower. Essentially, the company is saying that if bitcoin goes below US$21,000, it is in fairly serious trouble.
With bitcoin’s inherent volatility, and hitting as low as US$28,000 just last week, the company does not have a big cushion here. If bitcoin drops another 25 per cent, which is not much considering its big swings, the short sellers might smell blood, knowing that up to US$6 billion in new, forced bitcoin selling could hit the market. It could get ugly. The regulatory filing was like playing poker and giving your opponents a peek at your hidden cards.
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Article content How much money did we raise? Every investor knows the cannabis sector has been a complete disaster over the past few years. How bad has it been? Let’s look at Aurora Cannabis Inc., once one of the industry’s biggest players. Its stock dropped 38 per cent on May 27 as the company announced a $150-million financing.
Marijuana plants in an Aurora Cannabis facility in 2016. Photo by Gavin Young/Postmedia files But let’s take a look at exactly how much money this company has raised to date. With financings in 2021, 2020, 2019 (a big one of $400 million), 2017 (three separate deals) and a couple before that, the company has raised more than $1.3 billion from investors in the past five years. How much is the company worth after all this money was raised for a high-growth sector? You can buy the entire company now for less than US$400 million.
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Article content That’s what happens when you have multiple years of negative cash flow. The share count has soared to 2.7 billion shares from 10 million shares in 2015 (if one adjusts for the 1:12 share consolidation in 2020).
The ruble Many investment professionals postulated that shorting the ruble had to be “the easiest trade ever” when Russia invaded Ukraine. With global sanctions on Russia, and banking restrictions likely sending it into default, we even saw some predictions that the ruble was “heading to zero.” Frankly, while we have no interest nor experience in the currency market, this call made complete sense to us. Russia was being effectively shut off from most of the world, so how could the currency not go down?
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Well, the ruble has recently been hitting new highs. Even though Russia is paying off debt with rubles (which we assume investors immediately sell for other currencies), the ruble just keeps on climbing. Disgruntled short sellers say it is an “artificial,” manipulated price. That very well might be the case, but, regardless, they have still lost real money on this so-called easy trade.
The strangeness continues.
Peter Hodson, CFA, is founder and head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals. He is also portfolio manager for the i2i Long/Short U.S. Equity Fund. (5i Research staff do not own Canadian stocks. i2i Long/Short Fund may own non-Canadian stocks mentioned.)
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