ARK CEO Cathie Wood is beating 98% of her peers this year. She and her team share the investment cases for 2 'winner-take-most' stocks in their portfolios, and explain why she is unfazed by the rotation into value.
- Cathie Wood, CEO and CIO of Ark Invest, said on a Tuesday market update call that the recent rotation into value from growth is a sign of the bull market broadening out.
- Wood is not worried about her style of investing taking a backseat for a few days because of her five-year investment horizon, her high conviction in coronavirus turbocharging innovation, and the type of extensive research her team conducts.
- Wood and her team also laid out the investment cases for two 'winner-take-most' stocks in their portfolios.
- Visit Business Insider's homepage for more stories.
Cathie Wood is not worried about a few bad days for her portfolios caused by the reemergence of the value trade.
As markets digest the news of a Biden presidency and an over 90% effective COVID-19 vaccine from Pfizer and BioNTech, long-maligned value stocks staged a fierce comeback driven by financials, energy, and real estate. Meanwhile, growth stocks were dragged down by tech and work-from-home stocks.
"What's happening here is the bull market is broadening out," said Wood, chief executive and chief investment officer of $29 billion ARK, on a Tuesday monthly market update webinar.
She harkened back to the fourth quarter of 2016 when President Donald Trump was first elected.
"Around that election, there was a lot of volatility. And when President Trump was elected, the thought was the economy was going to catch a bid. In other words, the economy was going to be much stronger than expected," she recalled.
"So the markets turned around in the fourth quarter of 2016, had a very strong quarter with value leading the way," she added. "And we had a negative quarter."
Just like today, Wood saw the broader market reaction and the short-term setback of her portfolios back then the same way.
"The equity markets had broadened out in terms of sectors and industries and others," she said. "There were more participants in that bull market. It was broadening, it was becoming healthier, so we were not worried about our strategy."
She continued: "I will tell you the same today, in fact, with more conviction, because we are going to what we were beginning to believe at the time was prime time for our innovation strategies."
Wood's conviction certainly paid off four years later.
From electric vehicles to artificial intelligence, the innovation platforms that she and her team spend all of their time researching and investing in have not only taken share from traditional players but also become front and center due to the COVID-19 pandemic.
"Innovation has really addressed a lot of problems in this coronavirus. And I believe that we have turbocharged these platforms," she said. "We believe that because of the coronavirus, no matter what had happened in the election, these innovation platforms had hit escape velocity."
"We are hearing from all of our companies as they report earnings that they are seeing customers or inquiries today that they didn't expect for three to five years," she said, noting that this is where she sees the disconnect in the market.
Differentiating research on innovations
In addition to her high conviction in the exponential growth of the companies in her portfolio, Wood explains that the firm has been able to identify opportunities ahead of others because of their five-year investment horizon and the extensive research they conduct.
"In a five year period, the difference between linear growth, which is how most people think, and exponential growth can be extreme," she said.
Her research also indicates that there is still plenty of room to run for companies engaged in these five innovation platforms: DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology.
As inflation and interest rates continued to fall over the past seven to eight years, S&P multiples hit a ceiling somewhere in the 20 to 25 times multiple range. That meant the market corrected every time multiples hit that range, according to Wood.
However, she believes that the structural growth in the economy has slipped from the 4% to 5% range to something like the 2% to 3% range because traditional measures of economic activity are still rooted in the industrial age and the digital age is moving too quickly for the Department of Commerce to understand and incorporate into its statistical analysis.
"If you believe that normalized growth is 4% to 5%, you are probably willing to pay one divided by the 4% or 5%, that's 20 to 25 times multiple," she said. "Once we get through this V-shaped recovery, we're going to see surprisingly low nominal GDP growth rates in the 2% to 3% range. And if you do the quick math again, that would be somewhere between 33 and 50 times."
To be sure, Wood is not saying that multiples are going to that level. Instead, she is convinced that there is more headroom for these exponential growth trends to run, which will not be offset by a valuation compression.
"So we are pretty excited about our portfolios and we understand they've had a few bad days," she said. "But our conviction in this escaped velocity for our platforms caused by the coronavirus has also increased."
Two 'winner-take-most' stocks
Wood's highest conviction is reserved for companies with "tremendous growth," but she expects them to be "few and far in between," creating a scarcity value for these stocks that are in what she characterizes as "winner-take-most" situations.
"So Tesla in the autonomous taxi network, we think is a winner take most. Square in the digital wallet space, PayPal, to some extent Venmo as well, one or two winners," she explained. "Teladoc in the telemedicine or virtual care space."
As one of the biggest Tesla (TSLA) bulls on Wall Street, ARK has generated a lot of controversies due to its lofty target price for Tesla, which is $7,000 per share in 2024 on a pre-stock split basis.
Wood believes that most analysts are having a difficult time seeing electric vehicle makers' and especially Tesla's potential because they do not think exponentially.
"We know that especially Tesla's battery pack systems are going to continue to drive their costs down by 28% for every cumulative doubling in the number of units produced," she said.
"In the early days, linear growth and exponential growth do not look that much different," she added "But right now we can see Tesla widening the gap at a very rapid rate. And we're seeing now that traditional auto companies understand how important it is for them to jump on this bandwagon; it means their survival."
Based on ARK analyst Sam Korus' research, there is a $40,000 to $50,000 gap between Tesla and competitors with similar specifications in terms of range, acceleration, and performance.
"If you look at the Hummer EV and you compare those specs to the Cybertruck, they're fairly similar except for the fact that the Hummer costs $40,000 more," Korus said on the webinar. "If you look at the Porsche Taycan, the lower end model. That actually has similar specs to the Tesla Model three, except for it's $50,000 more expensive."
He added: "Right now, we're not seeing that gap close. If anything, we're seeing Tesla continue to pull away from the competition."
Another winner-take-most stock is Teladoc (TDOC), which acquired Livongo, a chronic-care company, in an $18.5 billion deal in August.
"The way to understand Teladoc is it initially approached the telehealth market or the virtual care market from the provider side and that's a lot of heavy lifting," Wood said. "Livongo is coming at the market from the patient side of the market, and it has a very strong position in virtual care for people with chronic disease, with diabetes being one of their biggest categories."
At the same time, Teladoc is seeing much more success in the behavioral telehealth or mental health part of the market, which also generates a recurring revenue stream, she explained.
"Teladoc and Livongo have come together and they've established a working group focused on artificial intelligence and how to use the explosion of information they are receiving from providers and patients and insurers," she said, noting that she is expecting the firm to do what she expected Athenahealth to do in the early days of ARK.
Another aspect that Wood likes about Teladoc is its successful infiltration into international markets.
"We've been surprised at how much they've been able to infiltrate certain economies — Canada and UK, importantly, thus far," she said. "And healthcare is nearly 20% of GDP in the US alone, with more than half of that is inefficiencies."
"And we think Teladoc has a huge opportunity to squeeze inefficiencies out of the system and make it a win-win for the players involved and those who decide to get involved with its network."
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