Stock Analysis & Ideas

ARKK: How Low Will Cathie Wood’s Funds Sink?

Shares of ARK Innovation Fund (ARKK) and other ETFs within Cathie Wood’s Ark Invest roster have crashed far harder than the broader tech sector.

Indeed, if the current sell-off intensifies, the flagship ARKK fund is at risk of surrendering all of its pandemic-era gains. Indeed, many beginner investors who bought the ETF on its way up are now likely deep in the red. Unfortunately, chasing momentum is a dangerous game, and Cathie Wood’s strategy of doubling down has only made the pains more severe.

As Wood continues doubling down on the top innovation stocks, eventually, she’ll be on the right end of a sharp ricochet once speculative tech finally bottoms out. Until then, there are few reasons to believe that ARKK will make a full recovery from its nearly 60% peak-to-trough implosion. In any case, I am mildly bullish on ARKK, as I think the damage has been overdone here.

ARK’s Innovation Stocks Crash Hard

Innovation is out, as too are expensive growth stocks and lacking in realistic profitability prospects. Despite the trajectory of rates, Wood is not changing her investment thesis. In fact, she believes that many of the hot stocks within her funds are trading at “deep value” territory.

It’s challenging to value high-growth innovation stocks like those within Cathie Wood’s ARK. One needs to look far into the future for profits, and I’m not convinced that ARK Invest’s unorthodox analysis is effective. Still, Wood may be right in that many of the stocks within her funds are oversold and overdue for a sharp rally.

The ARKK ETF is an interesting benchmark of the hottest speculative tech stocks that “worked” for most of 2020. Undoubtedly, the ARKK ETF makes the Nasdaq 100 index look safe, given the latter actually holds firms that are making a profit. It should come as no surprise to see the Nasdaq 100 hold its own, just above bear market territory, while the ARKK shed well over half of its value.

Is ARK Invest Chasing Innovation or Momentum?

Investors are being more selective rather than punishing stocks based on their sector. In that regard, innovative but profitable tech stocks like Apple (AAPL) have proven a solid pillar of stability in this choppy market environment.

Indeed, Apple is one of the most innovative companies out there. Still, you won’t find it in Cathie Wood’s ARK funds these days since the iPhone maker already comprises a sizeable position in your run-of-the-mill S&P 500 or Nasdaq 100 index funds. However, just because it’s widely owned by passive investors does not make it not innovative.

Could it be that Wood will pivot back towards some of the larger, more profitable innovative tech companies amid this sell-off?

I don’t think so. Wood seems like a believer in placing bets to own a piece of “the next big thing.” She did great with Tesla (TSLA) stock, but can she capture lightning in a bottle twice, with the tides turned so heavily against her?

Many of her fans are standing by her on the way down. Her transparency with investors is preventing the type of unfathomable outflows you’d come to expect when momentum reverses in such a vicious way.

Is ARKK Actually Deep Value, as Cathie Wood Thinks?

While I wouldn’t chase ARK’s falling knives, I think the damage has been overdone. Was ARKK expensive when it peaked just over a year ago? Definitely, but did it deserve to sink as low as it did? Probably not. Given many rate hikes are baked in, any slower-than-expected pace of rate hikes could induce a modest bounce-back.

Now, many stocks within ARKK that have shed over 80% of their value aren’t coming back. However, for new buyers, I do think there’s some value to be had for those comfortable with taking risks.

For now, ARKK looks more to me like a modest value than deep value.

The Bottom Line

Cathie Wood’s rise to stardom has come to a crashing halt. Wood is still answering the calls, though, at a time when it matters most. I find that to be respectable and think her believers will continue to stand by their investment in ARKK amid its brutal plunge.

Indeed, most ARKK investors are in the red for now, but if they’re willing to give Cathie Wood five years, I do think she can alleviate some of the damage. Though, I don’t suspect a full recovery in the timespan. Not with rates headed higher.

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