Timing is everything, but in the case of Cathie Wood’s latest buy, it may work against her. The founder of Ark Invest is well known for her contrarian stock picks. Her modus operandi is usually to bet on beaten-down tech stocks, often names that Wall Street has disregarded. Yesterday, she doubled down on Block (NYSE:SQ) stock, a fintech innovator that she’s been bullish on for some time.
Today, however, brought a damning short report from Hindenburg Research, accusing the mobile payment company of misleading investors by reporting fraudulent user data. Wood’s purchase hasn’t done much for SQ stock, which is falling on the news.
Is Wood right to be betting on the struggling tech company, even as it faces a potential legal battle? Let’s take a closer look at what investors should be expecting.
Wood’s Latest SQ Stock Bet
News of the short report sent SQ stock down 20% this morning. Since then, it has regained some momentum but remains firmly in the red. As of this writing, it is down 13% for the day, and its current trajectory suggests that its brief rally may be over. It won’t be easy to shake off the report’s accusations, particularly as the stock hadn’t been performing too well before Hidenburg published its detailed findings.
Block is one of Wood’s top holdings across multiple Ark Invest exchange-traded funds (ETFs). Yesterday, she added 58,233 shares of SQ stock to the ARK Innovation ETF (NYSEARCA:ARKK) and 9,431 shares to the ARK Next Generation Internet ETF (NYSEARCA:ARKW). Both funds are rising today, though they remain in the red for the week. SQ stock is among the top holdings in both.
Prior to the Hindenburg report, Block looked like a decent stock, despite its performance over the past month. Macroeconomic conditions were starting to shift in its favor. InvestorPlace contributor Muslim Farooque named it a winner among stocks to buy as digital payment systems help usher in the new financial revolution. Additionally, its applications as a blockchain stock might have excited some investors. However, experts may not be so bullish on SQ stock if the scathing allegations against it in the short report are accurate. As Hindenburg’s team notes:
“Block has wildly overstated its genuine user counts and has understated its customer acquisition costs. Former employees estimated that 40%-75% of accounts they reviewed were fake, involved in fraud, or were additional accounts tied to a single individual.”
Granted, Wood isn’t often deterred when a stock receives negative press. But the stocks she bets on are often pushed down by unfavorable market conditions or negative headwinds, not accusations of illicit activity that center around providing misleading data to investors.
What Comes Next
While Wood hasn’t commented on the short report, it’s hard to assess how she will approach the news. Hindenburg’s findings pushed SQ stock down in the short term, but if they are true, it will likely push shares down even more. Wood’s investing logic hinges on the theory that beaten-down stocks will inevitably rebound. If Block is guilty of what Hindenburg alleges, though, recovering to its previous levels will be much more challenging.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.