Signify Health: Cathie Wood Now Selling (NYSE:SGFY)

One of last week’s biggest winners was Signify Health (NYSE:SGFY). The home healthcare company saw its shares rally more than 15.6%, touching its highest point in roughly 11 months, after it was reported that CVS Health (CVS) may be interested in acquiring Signify. At Friday’s close, shares had more than doubled from their 52-week low, but they also may be losing a key supporter in the near term, as Cathie Wood and the ARK Innovation ETF (ARKK) are now selling a good amount of shares.

While no definitive offer is on the table yet as far as we know, an analyst at UBS last week detailed a couple of scenarios. In a leveraged buyout, a deal could take place in the $25 to $30 range, which would be decent upside from last week’s finish under $23 and even more from when the start of acquisition rumors started recently. However, the analyst there believes that a strategic buyer such as CVS could pay up to $39 and still have the deal be accretive to earnings.

Interestingly enough, wall street has been very positive on this name for some time. As the graphic below shows, the stock has traded well below the average price target on the street for past year, only touching it briefly once in the past couple of weeks. As of Friday’s close, the average price target represented less than 10% upside, so a buyout could represent more upside potential than just analysts see in the stock as is.

This gets me to where we are currently with Ark Invest. Cathie Wood and her team have a substantial position in Signify, which stood at more than 13.6 million shares in the Ark Innovation ETF at the end of last month and another nearly 8 million shares in the ARK Genomic Revolution ETF (ARKG). This represented more than 12% of the company’s outstanding share count, meaning Ark Invest owned nearly 1 in every 8 shares of Signify. This position doesn’t even include another 5.2 million shares that Nikko Asset Management Americas owned at the end of Q2. Nikko is a separate firm that mirrors the strategies of Ark, so it holds the same names but usually in smaller position sizes.

So far during August, the Ark Innovation ETF has had some redemptions, which has brought down the position size of Signify a little. However, the more meaningful action has been allocation sales reported in the daily trades e-mail from the ETF firm. These sales are a direct decision to reduce the size of a position’s weight in the portfolio. During all five trading days last week, Signify showed up in the trades report, noting the following sales:

• Monday: 994,801
• Tuesday: 429,233
• Wednesday: 179,906
• Thursday: 132,805
• Friday: 410,765

The total amount of shares sold there excluding redemptions was just under 2.15 million last week, or more than 16.5% of the position going into the week. This likely means that Nikko also sold, bringing its holding of Signify down a bit. If you look at volume data on Yahoo! Finance, Ark’s sales were a good portion of the week’s trading, with Ark Invest representing more than 22% of Friday’s volume for instance.

The reason I am discussing the Signify sales here today isn’t just because Ark Invest is selling, but because this is not your ordinary stock. Entities associated with New Mountain Capital, the firm that brought Signify public, controlled nearly 55% of the outstanding shares at the end of March. This means that if you look at float data provided by Yahoo! Finance, Signify’s float is only a fraction of its total outstanding share count.

I’ve talked about Ark Invest and their high ownership of plenty of names, as using Yahoo! data, the ETF firm owns more than 10% of the outstanding shares of at least two dozen companies. However, of those names that I follow, many have floats that are comparable or fairly close to their outstanding shares counts. There are only seven names on my list where Ark owns more than 16% of the float, and only one stock that’s above 22%. As you might have guessed, it’s Signify, and due to the New Mountain ownership discussed above, Ark Invest actually owned more than 31% of the float at the end of July, or nearly one in three shares. If you throw Nikko’s ownership into the mix, you could be looking at more than 38% of the float controlled by Ark Invest and related strategies, which is an incredible amount.

Should an acquisition be announced in the coming weeks or months, I’ll be very curious to see what happens with the Ark position. That will obviously be dependent on how the deal is structured. If it is a full cash deal, Ark will either tender their shares or sell early if there isn’t a massive arbitrage gap, the latter of which would allow them to reinvest the proceeds to other stocks sooner. If it is a stock-based deal with a name like CVS, perhaps they hold the shares into the newly combined company, but I’m guessing that Ark would sell because a name like CVS might not offer as much projected upside as most of their other speculative names.

Last week, Cathie Wood and her team started selling shares of Signify Health in the flagship ARKK fund. This will be an interesting situation to watch moving forward, because unlike other holdings, Ark and its related firm Nikko control a sizable portion of Signify’s float. With trading volume in the stock coming down to more normal levels after buyout rumors have cooled, further large sales could add pressure to this stock if they continue to be a significant portion of daily trading volume for Signify.