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0 Views· 29 June 2022

Cathie Wood Just SHOCKED Wall Street With Her BIG New Short



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Cathie Wood is betting big against two companies that are about to face serious financial issues. Value stocks are notoriously profitable relative to market valuations. Cathie believes there are two value stocks that are about to become unprofitable.
Cathie and other Ark employees have been internally testing a strategy that could make them substantial amounts of profit. The strategy is dubbed Ark on steroids, because it essentially de-risks her portfolio from overall market volatility while elevating returns. Two of the main stocks that she has been shorting are going through serious issues behind covers. These two stocks are Ford and GM. Ford and GM’s valuations have been rallying over the past twelve months. This is because investors have been betting on Ford and GM’s future role in electric vehicles. Ford began selling its first electric vehicle, the Mustang Mach-E in late 2020. The Mustang Mach-E is a fully-electric SUV with a price range and size similar to the Tesla Model Y. The specs of the vehicle are actually not too horrible in comparison to the Model Y, which is why value investors have been purchasing Ford stock. In addition to the Mach-E, Ford is about to start ramping up production for the Ford F-150 lightning, a vehicle that many pickup truck fans have been waiting for. General Motors has also been hyping up its upcoming lineup of EVs, most of which will start production by 2024. Even President Joe Biden hopped onto the bandwagon by praising GM CEO Mary Barra for leading the EV revolution. This all sounds great, but the truth is that most of these new products are causing major financial issues. Everyone knows that electric vehicle sales are going to accelerate going forward. However, electric vehicles still make roughly 3% of total vehicle sales. That percentage is even smaller for GM, as only 1% of GM’s vehicle sales are electric. Ford is in a similar situation with only 1.44% of their vehicle sales being electric. The fact that Ford and GM stock are rallying behind this is quite ridiculous. The two automakers are growing their EV sales, but 99% of their revenue is going to disappear. To make matters even worse, Ford and GM cannot afford to pour billions of dollars into EVs when their balance sheets are suffering. Ford has $110 billion of long term debt while GM has $74 billion of long term debt when excluding capital lease obligations. GM recently increased its EV spending plan by 30% to $35 billion, a move that investors were bullish on. Ford did the same too by boosting its EV spending to $30 billion, sending its shares to record highs. All of this spending is happening while Ford’s credit rating has been downgraded to junk and GM’s rating is almost at junk status. Funding such a large EV spending plan is going to be difficult while both automakers are struggling to keep their credit rating up. If and when these two automakers borrow money, it will have to be an extremely high interest rate. One of the reasons for these low credit ratings is their low gross margin. GM has a gross margin of 14.5% and Ford has a gross margin of 10%. To put this into comparison, Tesla has a gross margin of 23% and investors constantly criticize Tesla for not being profitable. If the EV transition negatively impacts Ford and GM’s margins, the automakers could instantly become unprofitable. Value investors typically invest in legacy automakers because of their low PE ratio. GM is trading at a forward PE ratio of just 8 and Ford is trading at a forward PE ratio of 10. That sounds incredibly low, but imagine what will happen to their valuations if these two automakers become unprofitable. This may happen soon, especially since 99% of Ford and GM’s revenue is about to disappear. Not only that, but Ford and GM are spending billions on EVs that will hurt margins significantly.
You might be confused as to why Cathie Wood is shorting Ford and GM when she can just go long on Tesla. After all, shorting a stock means that the maximum gain is 100% if the stock falls to 0 while the maximum loss is infinite. On the flip side, if you go long on a stock, the maximum loss is 100% while the maximum gain is potentially infinite. The reason why Cathie Wood is doing such a move is to hedge her portfolio against an overall market crash.

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