Cathie Wood’s flagship ARK Innovation Fund (ARKK) recently revisited its 52-week lows of around $36 per share amid the latest slide in the tech space. Indeed, the tech-heavy Nasdaq has shed over 30% from its highs, while the S&P 500 (SPX) is off 22%. Speculative hyper-growth stocks like those featured in the ARK line of funds have imploded, seemingly mirroring the Nasdaq index (NDX) when it crumbled during the dot-com bust.
With the Federal Reserve poised to deliver a colossal rate hike (expected to be 75bps), many of the remaining tech investors have thrown in the towel on some of their more speculative and unprofitable stocks ahead of time. Undoubtedly, the Fed has one tool to combat inflation, and it’s using it even as it sinks the stock market deeper into a bear market.
With shares of ARKK now off more than 75% from their 2021 highs, it’s quite a surprise to hear that Cathie Wood is still active, buying her favorite innovation stocks on the dip, while continuing to keep her investors in the light. She’s an incredibly transparent investor, and that’s a main reason why many investors — many of which are sitting on heavy losses — are staying aboard Cathie’s ark as it sinks. For now, I am neutral on ARKK.
Cathie Wood Eyeing a Bottom in the Technology Sector
Cathie Wood is as bullish as ever on innovation. Recently, she stated her belief that the market is approaching a bottom, and that tech stocks will be the first to recover.
Wood is an incredibly smart person. However, nobody can time markets with precision. Not the best economist in the world, and not even Warren Buffett. At this juncture, I’d take Wood’s comments regarding the timing of a market bottom with a grain of salt.
That said, Wood will likely be right in that tech — especially beaten-down speculative tech — will have the most room to run when the dust has a chance to clear. During the dot-com bust, tech imploded, but it was also the first to bottom out and sustain a recovery. Could the same happen this time around?
I’d argue it’s likely, given the market’s propensity to overshoot. High-multiple growth stocks clearly overshot to the upside in the middle of 2021. And today, I wouldn’t be surprised if they overshot to the downside, with many imploded growth stocks now sporting valuations comparable to your average dividend-paying “value” stock.
In any case, Cathie Wood seems fine with adding to her positions in names like Zoom Video Communications (ZM) on recent weakness. Whether or not tech bottoms this year, she’s standing by her original thesis, with a focus on tech-driven deflation, even in the face of the highest inflation we’ve had in over 40 years.
Cathie Wood: A New Class of Value Investor?
The great Warren Buffett isn’t a fan of differentiating between growth and value investing styles. To him, all investing is value investing in that he looks to get the most from every dollar he looks to invest in markets.
After a historic crash in high-multiple growth stocks, a case could be made that such hyper-growth plays are now a better value than some of the defensive dividend stocks that many flocked to in search of safety.
With the high risk of recession and uncertainties as to where rates will settle, it’s that much harder to evaluate firms that are nowhere near profitability. Higher rates mean distant cash flows will be worth less. However, they’re not worthless! Indeed, many investors seem to be treating them as such, and that’s where there may be value to be had.
Though ARKK could fall more than 80% from its high, as it sinks further into the abyss, I do think the fund is a great one-stop-shop for those looking to play a return to growth. Nobody knows when such a value-to-growth rotation will happen. However, the ARK fans should look at each one of the constituents and evaluate them and the damage that’s been done.
The Bottom Line on the ARK Innovation Fund
The ARK Innovation Fund’s blow-up is not causing Cathie Wood to shy away from the limelight. She’s focused on the long-term and is looking for tech to lead the stock market’s recovery.
Though many innovation stocks within ARK are incredibly innovative, the lofty prices Wood paid to get into many of them have exaggerated ARKK’s latest downfall. As she continues buying hard-hit tech stocks at these depths, she may be adding fuel to any future rallies.
Many speculative companies will rise again from the wreckage of the great 2021-22 tech bust. However, not all of them will be able to. That’s why it’s wise to be selective when it comes to the stocks that are off more than 80% from their highs.
Though Cathie Wood’s ARK funds are closer to a bottom than a few months ago, I’m not yet ready to bottom fish.
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