Ark Investment Management, the renowned disruptive growth stock firm headed by Catherine Wood (Trades, Portfolio), has caught a lot of flak in 2022 as many of its holdings have plummeted amidst the market selloff. After the firm’s tech-based portfolio soared to the skies amidst the fiscal stimulus-driven market bubble, it has now fallen back to earth due to rising interest rates, inflation and a weakening economy.
That does not mean Wood has lost sight of her investing strategy, though. In fact, according to exchange-traded fund data compiled by Bloomberg, Wood’s firm bought the dip when stocks tanked on Tuesday, picking up shares of 27 stocks across eight of its ETFs. The top buy was Roku Inc. (ROKU, Financial), followed by Butterfly Network Inc. (BFLY, Financial) and Zoom Video Communications Inc. (ZM, Financial).
Regardless of whether or not one agrees with Ark Invest's strategy in general or its stock picks in particular, there is something to be said for sticking with a consistent strategy. In fact, history has shown that investors who frequently change their strategy depending on what's popular rarely turn a notable profit, since this approach typically results in buying high and selling low.
Doubling down on conviction picks
Tuesday saw the Nasdaq 100 record its worst single-day drop since March 2020 as inflation remained high despite gas prices falling last month. The news spooked investors who had been hoping the Federal Reserve’s more hawkish stance would have yielded some results by now.
It is certainly not a good time for growth stocks. Roku’s stock is down approximately 71% so far this year, while Butterfly Network has lost 14% and Zoom is down 58%.
The valuation reset has not taken Wood by surprise as it has many overly optimistic growth stock investors. In a CNBC interview on Feb. 17, 2021, she said, “There will be a valuation reset, there will be fear, I’m sure, and we will use it to our benefit,” adding that Ark Invest would then sell certain loss-making positions to buy its highest-conviction names.
Thus, it seems like these are high-conviction picks for Wood, since she is loading up on shares as prices drop.
Buying value or buying losers?
Buying stocks when their share prices are decreasing is a risky endeavor, which is why many investors are wary of value investing and the “buy the dip” strategy. It is often difficult to tell how much of the price correction was due to previous overvaluation and how much was due to declining fundamentals or slowing growth.
On the one hand, buying low and selling high is how investors make a profit, but buying the losers and selling the winners also seems like a sure-fire way to destroy wealth.
Whether buying a stock in decline means buying a loser or buying a value opportunity depends on the individual company and its long-term prospects. Investors should not shy away from taking advantage of short-term market pessimism, but if the company cannot produce meaningful growth going forward, then the market may not ever recover its enthusiasm for the stock, even if it produces solid financial results.
Roku, Butterfly Network and Zoom are all disruptive growth companies that Ark Invest sees a clear long-term bull case for, but they also all face stiff competition and historically, it has proven extremely difficult to predict which tech companies will stand the test of time and which will fade into obscurity.
One important thing to note is that since Ark Invest’s valuation models project future growth, a big component of the firm’s valuation targets is interest rates. Wood is one of Wall Street’s most vocal proponents of deflation, predicting the Fed is hiking interest rates too fast and will be forced to reverse course. If interest rates were to reach zero again in a case where the economy is not in a recession, it could be good for growth stock valuations. This is currently considered a contrarian view as inflation is running rampant as of September.
Wood’s comments on Tuesday’s top buys
On July 7, Ark Invest published research on why it believes Roku could hit $605 per share by 2026. While the company is not trending in that direction at the moment, the firm used predictions such as active user account growth, how much content the accounts will stream on average, Roku’s ad rates, profit margins and more to arrive at its estimate.
Butterfly Network makes a revolutionary portable ultrasound device that enables ultrasound on a chip, with the results being able to be output to a mobile phone app. Wood has not discussed this holding as much as Roku and Zoom, but in a CNBC interview said she liked the stock despite the fact that it went public via a special purpose acquisition company, which she is wary of due to the unfavorable incentive structure.
According to a June 8 research report, Ark Invest has a target price of $1,500 per share for Zoom to reach by 2026, with a bear case target of $700 per share. The $1,500 case does seem a bit extreme; the firm explains the reasoning behind this estimate as a combination of knowledge workers pushing back against office mandates, increasing monetization rates and Zoom’s artificial intelligence-enabled products and services.