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PreMarket Prep Stock Of The Day: Cathie Wood Buys The Zoom Video Dip

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upco...

Benzinga · 09/01/2021 17:20

Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.

On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.

One name that is highly associated with “buy the dip” is Ark Invest’s Cathie Wood. Over the last year or so, she has earned the reputation of being a big buyer on dips, especially in high-valued growth stocks in the technology sector.

That was the case with Zoom Video Communications (NASDAQ:ZM) on Tuesday after its drubbing following its second-quarter report. Attempting to identify Wood's intraday buying and its implications for Wednesday’s price action makes it the PreMarket Prep Stock of the Day.

Zoom's Q2 Report: After the close on Monday, Zoom reported quarterly earnings of $1.36 per share, which beat the analyst consensus estimate of $1.16 by 17.2%.

The company reported quarterly sales of $1.02 billion, which beat the analyst consensus estimate of $990.96 million by 3%.

Yet the Street heavily focused on lower third-quarter guidance for EPS of $1.07-$1.08 vs a $1.09 estimate, and for sales of $1.015-$1.02 billion vs a $1.01-billion estimate.

The Street was not enamored with FY 2022 guidance for adjusted EPS of $4.75-$4.79 vs a $4.67 estimate and for sales of $4.005B-$4.015 billion vs a $4.01-billion estimate.

No Mercy For Zoom: As expected, the lower guidance from an already overvalued company brings out nothing but sellers. In brisk after-hours trading Monday, the issue swooned from its closing price ($347.50) to end the after-hours session just off its low at $305.50.

After a small bounce to $310 at the start of premarket trading Tuesday, more sellers reemerged. The selling continued during the regular session until the issue finally bottomed at $288.30 and rebounded slightly to close at $289.50.

Speculating On Where Cathie Stepped In: A common practice —one that has been much more profitable in the past — is for investors to anticipate that Ark Invest will be aggressive buyers on dips of this nature. As a result, these investors are aggressive buyers during the season as well.

Their payoff comes when Ark Invest discloses its buys and sells in a daily email update. On many occasions, “Johnny come lately” buyers attempt to mimic her buying and aggressively purchase shares in the after-hours and premarket sessions. The corresponding bump in price allows these savvy investors to unload their stake in a rising market, sometimes all the way into the following day’s session.

The Strategy Works Again: In the firm’s daily email update, Ark disclosed the purchase of $56 million in Zoom stock, equating to 194,080 shares, across all of Wood's funds.

Since the update did not come until the after-hours session had ended, buyers had to wait until the 4 a.m. EST open for premarket trading Wednesday to get in on the action.

As a result, the copycat buyers instigated a higher open that persisted until the opening bell.

Zoom Price Action: After a higher open in the regular session ($292.85), the issue had a brief dip, ripped to $299.40 and then reversed course.

The stock ended Wednesday's session 0.47% higher at $290.86. 

Ark's Treading Tactics: In order to purchase the number of shares that Ark Invest did on Tuesday, the firm has to be careful not to be identified by the algorithms and other predatory buyers.

The chart below attempts to identify the slow accumulation of shares in Tuesday’s session.