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We will buy the Ark Space Exploration ETF on launch day (BATS:ARKX)

DISCLAIMER: This notice is intended for US recipients only and, in particular, is not intended for, or intended to be relied upon by, UK recipients. Any information or analysis contained in this note does not constitute an offer to sell or the solicitation of an offer to buy securities. Nothing in this rating is intended to be investment advice nor should it be relied upon in making investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may hold a position in stocks, securities or financial instruments referenced in this note. Any opinions, analyzes or probabilities expressed in this note are those of the author as of the date of publication of the note and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be clients of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values ​​both its independence and transparency and does not believe this presents a conflict of interest. significant potential or affects the content of its research or publications.

The Big Bang Theory

A few years ago, Intel (INTC) conducted a magnificent advertising campaign, Our rock stars are not like your rock stars. There were a number of commercials in the series, including our favorite as Diet Coke Guy, one of the co-inventors of the Universal Serial Bus standard. (Thanks to the wonders of the modern world, you can still watch it on YouTube, here.)

Intel Rock Stars

Source: Intel / World Announcements

Just as technology has its rock stars, so does fund management. And right now, no one is selling more stadiums than Cathie Wood at Ark Invest. We have already written about two Ark ETFs, namely Ark Innovation ETF (ARKK) and the arch Next Generation Internet ETFs (ARKW). You can find these notes here and here.

Fund management rock stars, while they sell out on every tour, are essentially self-fulfilling investment prophecies. Capital flows to them. Businesses flock to them. They are picky about their choices. They themselves limit the companies they choose and offer those choices to a theoretically unlimited capital market. The supply is limited, the demand unconstrained, the price of funds increases. It works in venture capital funds, buyout funds, and exchange-traded funds.

Ark is on a hot streak right now and we think it still has some time to run. Like everything in life, what goes up must come down, and at some point Ark is going to slip and end up making a stiff drink and telling the youngsters stories about what it was like when they were a bomb. But fund management is a curious profession and its cycles are long. In venture capital, for example, while there are smaller, hotter companies than Sequoia Capital, nearly fifty years after its growth, Sequoia remains a manager whose money cries out and whose founders seek blessings. (These founders might not admit it. Being cool entrepreneurs and all. Not bothered. I’d rather get money from a knitting collective. But secretly, in the dark hours of the night, contemplating the inner torture who led them to become number one? They want good Sequoia).

Ark is about to launch Ark Space Exploration ETF (BATS:ARKX). This is a highly anticipated fund. You’ve probably been reading for a few years about how space is a growing market, trillions of dollars up for grabs, etc. CNBC has a dedicated space beat, Morgan Stanley has a space research team, and Elon Musk has also done his part by, you know, quietly embarrassing Boeing (BA) by sending people to the International Space Station without any software glitches. If you’ve come across our own work – we’re one of the few space sector specialists in investment research – you’ll have heard many of the same messages.

Space is now starting to be an investment category. On public equities, recent gains were secured by Maxar Technologies (MAXR), Aerojet Rocketdyne (AJRD), Iridium Communications (IRDM) and others. (You can read our long Seeking Alpha coverage of these names here – just choose the ticker). And in the latest market development, a number of SPACs have been active in the space, with good reason. Galactic Virgo (SPCE) is the highest profile to date; some of the most spectacular returns came from Stable Road Acquisition Company (CARS) which has not yet finalized its merger with the target Momentus Space, but has still accumulated big – almost doubled in just two months.

Cestrian Capital Research – In search of an Alpha rating on the SRAC

Source: Alpha Research

So in ARKX we have a hot sector and a hot fund manager coming together in an all-powerful interstellar collision. It could lead to a meltdown – everyone getting too excited at the same time – but we think not. We believe that ARKX is the first step for pureplay space companies to be true traditional investments that are well understood and broadly articulated to capital markets, whether institutional or retail. Additionally, we would speculate, ARKX could be a means of gaining indirect exposure to any future SpaceX (SPACE) IPO at something like a reasonable price. Ark’s largest holding among its many ETFs is Tesla Motors (TSLA) and the manager used its open, published research platform to standardize TSLA as an innovation-driven company in the eyes of investors. Ark and TSLA fans – and we count ourselves among them – choose to ignore Musk’s crazy tweet of the day and focus instead on the multi-faceted future potential that TSLA offers believers. We don’t cover TSLA – the sharpest TSLA analyst around Elazar Advisors, and we have nothing to add to their coverage – but like many others, we’ve enjoyed some crazy stock returns in our personal accounts, and Ark can be thanked for at least some of that crazy. As a result, we would expect Musk and Ark’s relationship to be mutually beneficial – we see no reason why SpaceX can’t.

Open, published research is the antithesis of traditional fund management. In the old days – that’s about five years ago, what you did in fund management was to hire very, very, very smart people and pay them a really huge amount of money every year if they could give you a head start on the market. Weeks or months ahead of the market; or, if you trade fast enough, a few seconds ahead of the market. You put these people in a dark basement and never let them go, and most importantly they were required to follow the first rule of fund management research, which is, you don’t talk about your fund management research. funds. Ark does the opposite. He positively vomits opinion into any internet platform you can find. To chase. Search it on Google. Some of their things are even on GitHub. It’s a great decision if you think about it. In public stocks, you’re not trying to find a hidden gem that no one knows about and keep it to yourself. What you’re trying to do is find that gem just a little before others, buy some, and then tell EVERYONE how awesome it is. Whereupon the stock rises, all other things being equal. And assuming your research is at least pretty good and you don’t pick the stinkers too often, it’s a repeatable business model. Companies want their shares in your fund because you talk about it everywhere once you’re there; investors want to be part of your fund, because you’re talking about these companies, so you’re talking about your fund; everything moves up and to the right. Free money!

Now you can see this won’t work forever. It’s too beautiful an economic model and capitalism hates beauty, it persists in the idea of ​​destroying it. Go check out a rainforest these days if you doubt it. So one day, quietly, without anyone noticing at first, the returns of the Ark will stop, slowly but surely the companies will not be so eager to be in their funds, the capital will be reluctant to rush , and the whole vortex will decelerate into a steady old 7% activity per year. (Which, by the way, is still wonderful compared to most other business models). If you’re an Ark fanboi and think this current situation is forever, we’ll talk about it in ten or twenty years and see how it worked out. The biggest risk, the most likely fault line, is that the company will not thrive after its founder Cathie Wood – the real rock star here – retires, which she will at some point. Personality-driven fund managers have an obvious flaw given that personalities have a lifespan.

But to be clear: we think it’s still a long way off. In the personal accounts of our staff, we are long on each ETF Ark, in varying proportions. They all did well, some better than others, but all in place. And we plan to buy a good allocation of ARKX on launch day. We know the space sector as well as anyone and better than anyone – it’s our core business (and one of us has a piece of paper from the International Space University – yes that’s one thing, no, unfortunately it is not in space). Because we think Ark can repeat that TSLA trick with a number of space companies. So we see gains from owning the ARKX fund itself, and we see gains from owning companies in the industry before ARKX buys or before it buys big.

We’ll be covering ARKX in more detail as we learn more. For the moment? We are at Buy. When it is possible to do so.

Cestrian Capital Research, Inc – January 15, 2021.

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