Are Tesla And Ark The Catalysts That Break The Market?

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Are Tesla And Ark The Catalysts That Break The Market?

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Tesla Inc (NASDAQ:TSLA) And ARK Innovation ETF (NYSEARCA:ARKK) – The Catalysts That Break The Market. Here’s an excerpt from the podcast:

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Q4 2020 hedge fund letters, conferences and more

Are Tesla And Ark The Catalysts That Break The Market?

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Tobias: My topic is I think that there’s some risk because of the scale of ARK in the market and the size of Tesla. I haven’t talked about Tesla, because it’s been running up a lot, but it’s come off a little bit recently, there’s nothing much. It’s had lots of these little turndowns. I’m not calling the top or anything like that.

Bill: This is a bigger deal than Bitcoin.

Tobias: Tesla is an enormous company now. I don’t know anybody outside of financial markets, who doesn’t own it, everybody who I talked to has a gigantic slab of it. I know people who’ve sold half-million-dollar retirement accounts to go all in on bitcoin– Sorry, all in on Tesla, and it’s up and they’ve doubled it.

Jake: Freudian slip.

Tobias: Yeah, they’ve doubled over the last like 12 months or something like that, so they’re ecstatic. I just wonder if there’s some risk. If Tesla cracks, that’s a lot of people who may panic and may come out, and ARK has a big concentration in that, so ARK gets stung a little bit. Then one of the problems with ARK is that they have a lot of– they’re very big holder in very illiquid names. There’s some tweets around today by Edwin Dorsey who’s StockJabber, he does some great short-focused work and he’s written an article on ARK. He’s just identified how big ARK is in a lot of these names. They’re 20% plus in a lot of these names. There hasn’t been a problem while the money has been rolling in, which it has been, they absorb most of the money, but when it reverses, what happens?

Bill: May I speak?

Tobias: Please do.

Bill: I was raising my hand. Just out of curiosity, and I don’t know them, I don’t know you, Cathie. I’m sorry about what I’m about to say. If you ran a strategy that had a bunch of illiquid holdings, would you post your positions daily?

Tobias: The trades, yeah. I mean, an ETF has to run, but you don’t have to post the trades.

Bill: That’s what’s going on? Okay. I don’t know.

Tobias: You don’t have to post the trades, she posts the trades. A lot of people follow along.

Bill: Yeah, because I see people saying that, like, this is what they bought today. It’s like, “Man, this has got a lot of reflexivity to it here.” If it’s thinly traded, woo, that stuff makes me more nervous than what’s going on in GameStop.

Tobias: They’re not the most concentrated in Tesla. There are three or four ETFs that have a bigger concentration in Tesla. They are 10% in Tesla, so it’s not necessarily fatal to them what Tesla does, but there seems to be a lot of peripheral stuff that they do hold this down quite a lot.

Jake: Is that S&P 500 ETF I’ve heard so much about?

Tobias: [laughs] Yes. [crosstalk]

Jake: That was pretty heavily concentrated, isn’t it?

Tobias: How much? I don’t know what the waiting is, I probably should have looked it up. The waiting of Tesla and the SPY, does the crowd have a view on that? What’s the waiting of Tesla and SPY? It can’t be too big.

Bill: Yeah, I don’t know. This story makes me much more nervous than like– I don’t know. Even the retail participation to be– and I do think that they’re a little bit tied together because I do think retail is maybe following her right now. This, I think could be a real deal. It’s a lot of flows.

Tobias: I almost tweeted this up, but I already get enough hate mail on Twitter, so I didn’t do it. I thought, if Tesla cracks, probably ARK cracks, if ARKs, probably software and tech go, and if that happens, then the whole market goes. I don’t know if that’s going to happen or not. That sounds like a macro thesis where you get four things in series, and any one of them doesn’t happen, it doesn’t happen. That’s what I think is probably going to happen to this market eventually, and maybe happening now. I don’t know.

Jake: Well, the tough thing about that is that– Well, Chris Bloomstran, which we’ll get to eventually, walks through a nice little piece of math on Tesla. This is the problem is you’re now racing math, and that’s usually not where you want to be. If you’re the bellwether for the whole market, and it’s going to go where Tesla goes, you’re trying to outrun gravity or physics or something. I don’t know, it is questionable.

Bill: To be fair, though, we would have said this, how many times?

Tobias: Many.

Jake: We have already.

Tobias: [crosstalk] -said many times.

Bill: We basically have how much standing to say this?

Tobias: Not a lot.

Bill: Arguably less than none?

Tobias: Yeah. Not a lot.

Bill: That said, it doesn’t mean we’re wrong.

Tobias: Here’s the thing, as a value guy, you don’t get to pick the turn in the market for the most part. You don’t get to pick the turn on your stocks. Nobody knows when it turns, you just know that you’re getting a good value for what you’re buying, and you think that the market will figure it out eventually. It’s never really concerned me necessarily that it hasn’t happened yet because I think that math, it acts like gravity, it does eventually catch up to you, it gets you. If the underlying is growing at some rapid rate and the stock price gets away from it, that’s okay, because eventually the underlying catches up to you. You might have dead money for a long time, but you’re not in any sort of great danger. But if your company that needs continued access to the markets– maybe Tesla doesn’t anymore. Maybe it’s not a good example, because they seem to have–

Jake: Oh, yeah, it does.

Tobias: Well, the net cash–

Jake: We’ll walk through some numbers. [crosstalk]

Tobias: All right, that’s a good segue then.

Bill: Tesla appears to be 1.65% of the S&P.

Jake: Okay.

Bill: It’s not like a ton. If I told you, you needed to lose 2% of your body, you wouldn’t be like, “Oh, my God, that’s so much.”

Tobias: Can I pick the 2%? [laughs]

Jake: [chuckles]

Bill: No.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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