Experienced trader and wealth manager Raine Lahtinen continues his ongoing series looking at the much followed ARKK ETF managed by Cathy Wood. He is interested to see if there are any lessons for active stock market investors to learn from her activity.
What can investors learn from ARKK?
ARKK defines ‘‘disruptive innovation’’ as the introduction of a technologically enabled new product or service that potentially changes the way the world works. I, myself strongly believe that is the key to successfully stock picking. Is ARK in the right 20 stocks? That is the question.
Which of the ARK 20 biggest holdings have “their max disruption potential” already priced in? Is ARKK’s AUM – $20bn – so big that it’s forced to allocate too much to these big stocks, which results in dilution and reduces superior returns – or is it just “lucky” with Covid-19 to be in these stocks?
Can we replicate an ARK clone with less than or different disruptors that can rocket upward higher and faster? Maybe those seven stocks, which are still up YTD in the top 20.
The big question is – what is Cathy Wood doing wrong? Well – Zillow was a bust – a rare one, but Wood totally changed her mind in a few trading days last week. The stocks I like in her top 20 list are the positive ones YTD. I really like the top three positive YTD holdings, namely Tesla, Coinbase (reporting Tuesday after market close) and Shopify.
Cathy Wood’s top five positive positions in ARKK by market value – YTD% gain USD
- Tesla (+73.18%)
- Coinbase Global (+30.51%)
- Shopify (+40.79%)
- Square (+9.07%)
- Intelia Therapeutics (+149.04%)
With now 79,61% (78.85%) of the fund’s assets in the top 20 holdings I will concentrate my analysis going forward on the moves inside the top 20. The top three have changed this time and there has been some serious selling again in Tesla – why, I would ask, because Wood can hold it with its special 1940 Act status at more than 10%+, it does not make any sense to sell it yet if Wood’s target price is so much higher!
ARKK is classified as a “non-diversified” investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), which means that it may invest a high percentage of its assets in a limited number of issuers.
Two trick pony with Tesla and now Coinbase?
Tesla is still a clear number one holding of ARKK’s assets – Wood has been a long time Tesla bull, and her conviction on the electric vehicle marker hasn’t eased, even after the stock’s massive rally in 2020 and 2021. She said her base case for Tesla is $3,000 in five years with the best case set around $4,000.
Tesla closed Friday November 5th at $1,222.09. So Wood and the team have been selling almost 1 million shares of Tesla since September 14th to raise prices, taking the position still in the fund from 9.65% to 11.44%. That would tell me that the fund is bleeding cash and/or she thinks Tesla is overvalued right now. Maybe both, because that is the only answer with this question.
“I am always looking for cash, especially in the flagship fund, which is very concentrated and involves all of our technologies,” Wood has said. She was also very bullish on cryptos especially Bitcoin to raise ten fold over next five years to $500,000.
Bleeding cash on losing investments
The ARKK ETF does not hold direct crypto holdings yet, but Coinbase Global (COIN) is a large holding and ARKK has been adding to it in the last two months moving it to #3 6.16% from #5 4.66% among the top ten holdings of the ARKK ETF. The problem with the top 20 is that only 7/20 stocks have positive YTDs. This would mean Tesla has been used as the cash asset for bleeding cash from the fund and averaging down on losing investments.
Exit from Zillow last week
Even Wood makes mistakes, buying in to the drop, and then something really bad was revealed by the Zillow group and Wood seriously dumped her remaining stock. Zillow is now number #40 in the list of holdings of ARKK’s 45 holdings. Being a very open and public fund this was reported extensively last week that Cathie Wood was buying the dip on her favourite real estate stock, despite the revelation that Zillow Group is giving up on its home-flipping business.
The innovation investor bought 288,813 shares of Zillow Group on Tuesday last week as the stock tanked more than 10%. The position was purchased in her flagship fund, Ark Innovation, and is worth roughly $25 million, based on Tuesday’s closing price of $87.20. Shares of Zillow continued their dismal rout Wednesday — dropping more than 17% — after the company said it’ was shuttering its home buying unit, called Offers. Zillow is also eliminating 25% of its workforce as it exits that business. On Thursday and Friday Wood almost closed down the position entirely.
The trading range and net assets
The ARKK closed Friday November 5th, 2021 at $122.22. The 52-week trading range of ARKK is $159.70-91.80. The All Time High (ATH) was achieved February 16th, 2021 and the 52-week low November 10th, 2020.
ARKK “The Flagship Fund” had net assets of $25.5 billion June 30th, 2021. My calculations are from the daily Holdings Data ARKK pdf dated November 8th, 2021 provided daily in their excellent website ark-funds.com/funds/arkk – ARK have roughly $20 billion in assets in the fund.
The ARKK June 30th, 2021 price was $130.78. The fund managers have lost nearly $4 billion since then or almost -16% of the assets under management. Currently they are holding 44 (55 max) different stocks.
I would start an ARK position near $98-102, with a 10% trailing stop. If the ETF ARKK breaks a 52 week low I would close the position. The Tech sell-off is over like I said in my earlier article. The expense ratio of the ETF is 0.75% p.a., which is excellent compared to the other actively managed funds (1-3%).
ARKK starts to look like it was in the right place in Covid-19 and now it is producing average YTD performance -3.16% or worse… watch this space for my select velocity-disrupters for 2022!
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