- Kathy Wood of Ark Invest has promoted disruptive work and defended its valuation methods.
- Billionaire investors Dan Loeb and Clive Essence mocked her comments on Twitter.
- Arc’s holdings plummeted as inflation, rising interest rates and recession fears spooked markets.
Ark Invest’s Cathy Wood defended its aggressive approach to evaluating disruptive businesses, targeting some of the more established companies and their shareholders, in a commentary this month. Two billionaire investors, Dan Loeb and Clive Essence, responded via Twitter on Wednesday.
What did Wood say?
Wood’s flagship Ark Innovation Fund (ARKK) more than quadrupled in value between March 2020 and February 2021. It has given up all those gains since then, as investors continue to roil loss-making growth stocks and technology companies in the face of historic inflation, rising interest rates , and a looming recession.
The tech investor — whose best stocks include Tesla, Zoom and Block Inc — brushed off doubts about her favorite companies in her comment. She said they are sacrificing short-term profits to take advantage of huge opportunities that will yield much greater profits in the future.
To properly value next-generation technology companies, Wood explains, they adjust their earnings to include deferred revenue and exclude research and development, stock-based compensation, and sales and marketing costs. She added that her goal is to assess the companies’ potential growth, future cash flows, and “basic profitability.”
“Short-term traders, analysts and portfolio managers often distinguish ‘good’ from ‘bad’ earnings on a GAAP-based EBITDA basis,” she said, referring to a standard measure of a company’s earnings.
Wood has also targeted some mature companies that are taking on debt to pay dividends, buying back shares to boost their profits. She warned that their failure to invest in the future leaves them vulnerable to turmoil.
“Companies that cater to short-term investors and leverage their balance sheets to pay dividends or manufacturing profits through share buybacks don’t seem to us investing enough to catch these waves of innovation,” she said.
What was the backlash?
Loeb and Anasis objected to Wood’s idea that the investors who make the main profits are traders who focus too much on the short term.
“Anyone teaching a value investing class or investment psychology class should use this note as a thesis to study the mindset of ‘stone scammers,’” Loeb. chirp. He was referring to the pandemic surge of amateur investors piling on meme stocks and nudging one another on social media.
“Note the disparaging comments about luddites who look at ancient measures of value like cash flow as short-term traders,” the Third Point president added.
Asness, founding director of global investment fund AQR, echoed Loeb’s comments.
“Sing it Dan” chirp. “The value investors who have to get rid of the obsession driven by people like her are the ‘short term’ investors. And they are very wrong.”
“But its forecast of $1 billion GDP growth and expected revenue of $1 billion was a hint,” Asness continued.
Wood also called for an exaggeration of the rate hikes by the Federal Reserve this year. The chief astrologer coined the ascension in a twofold perspective, such as “13.5x increaseTo prove that Fed Chairman Jerome Powell acted more aggressively than his predecessor Paul Volcker did in the 1980s.
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