Cathie Wood's conviction in ARK Invest's 5 year price targets has only gone UP over the last
few weeks. In her opinion, the market has been discounting growth stocks by 30 to 40 percent,
which means ARK Invest's 5 year performance is going to skyrocket... IF she's right.
In this episode, we'll look at a few factors that
I believe are making Cathie Wood even more bullish on innovation
and then ask the big question: should we really be THIS confident in ARK Invest?
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Let's get right into it: ARK Invest's performance for the year is way down
but Cathie Wood's confidence is WAY up. What gives?
Okay, so that's the jumping off point:
ARK Invest's 5 year price targets are staying the same,
even though the market has changed dramatically since February. In previous episodes, I pointed
out that Cathie Wood has been buying up advanced internet companies and stay-at-home stocks like
Twilio, ticker symbol T W L O
Coinbase, ticker symbol C O I N
Twitter, T W T R
Draftkings, D K N G
UiPath, ticker symbol P A T H,
and Skillz, ticker symbol S K L Z.
You can find my deep dive into what Cathie Wood has been buying during the recent bottom for
growth stocks in the top-right hand corner of your screen right now and in the description below.
But aren't stay-at-home stocks super risky now that things are opening back up and the weather is
getting better? Isn't that why people are rotating their money out of high-tech growth stocks in
favor of less volatile value stocks and cyclicals? Shouldn't ARK Invest be doing that as well?
We'll get back to those commodity prices in a minute.
The first bullish factor I want to cover is how spread out the bull market is getting.
Cathie Wood is saying that the bull market extending past her type of growth stocks
to value and cyclicals is a good thing for a few reasons. First, the economy is
strong enough and people feel safe enough buy these stocks in the first place, instead of
focusing exclusively on other assets like their homes, stocking up on goods, bonds, and so on.
Second, the bull market being extended now means it will narrow down in the future
once value and cyclical stocks are no longer providing competitive returns.
That's the launching pad Cathie Wood is talking about - people injecting money into the market
and then rotating that money back into growth stocks, pushing the prices up for
all the stocks that ARK Invest has been buying at these 30 to 40 percent discounts.
But wait a minute. If things are opening back up and there's all this pent-up demand to travel,
shop, and eat at restaurants, won't these businesses inflate prices and make a killing?
That's the point of recovery stocks, right?
This is our second factor and it's a really important call-out. Inflation and rising
interest rates are exactly the types of things that jam up ARK Invest's growth-oriented strategy.
Thinking we're setting up for a massive period of *deflation* is very contrary
to all of the headlines going on right now. If Cathie Wood is wrong about this,
her performance WILL suffer for it. So, how is Cathie Wood coming to that conclusion?
Commodity prices like lumber and copper are another bullish factor worth talking about.
Those prices spike when businesses panic-buy to fill their inventories in response to a
steep rise in demand from their own customers. So, businesses are double and triple ordering,
but consumers have already stocked up by now and are switching to paying for services and
experiences as things open back up. That's going to lead to a lot of canceled orders for things
lumber and copper, meaning there will suddenly be a lot more supply than demand, deflating prices.
Remember, money isn't made when things go as expected;
it's made when you see something before everyone else does. Money is made on
surprises relative to expectations. Cathie Wood is using the recent fall in copper and
lumber prices to point out that inflation won't hit us in the ways most people expect.
If she's right, there will be two surprises on inflation, relative to expectations:
the first is it will be a lot more narrowly focused on services and experiences
as opposed to goods. The second is that it will be short-lived,
lasting from when things open back up only until these services satisfy that pent-up demand,
just like she points out in the most recent episode of In the Know with Cathie Wood:
You get the drift. This connection between current commodity prices, business inventories,
consumer behavior, and investing in stocks is the real value I get from watching In the
Know with Cathie Wood on the first Friday of each month. She goes into a lot of detail about all of
the factors that could affect growth stocks in general and ARK's funds specifically.
The special thing about this latest episode is that A LOT of factors she looks at are
starting to point to a big rotation back into growth stocks. Oil demand and
gas-powered vehicle sales are down, signaling an accelerating shift to electric vehicles.
Recent talks around tax policy are a lot more market friendly than what was getting priced
into the markets earlier in the year. The ten year treasury bond yield is coming down,
which is something people usually buy to protect against inflation.
I'll leave a link to her latest episode in the description below but my personal opinion on
it is this: many factors that are important to ARK Invest's performance are starting to line up
in their favor. Here's how they all fit together and what happens next, according to Cathie Wood:
So, let's bring the whole thing full circle. According to Cathie Wood,
the whole market has been over-pricing in all of these factors:
interest rates and inflation and high tax rates. Even with all that downward
pressure on prices, the bull market is still going strong and is very broad.
Once services fulfill all the pent-up demand and value stocks and cyclicals cool off,
this strong bull market will focus more narrowly on growth stocks, which will rally
even harder as interest, inflation, and tax rates come in lower than most people expect.
Commodity prices coming down and treasury bond yields coming down and oil demand staying down
are early indicators that appear to confirm this setup to Cathie Wood,
and she has loaded her funds up accordingly. Now,
with what I think is the right context, let's look at that intro clip one more time:
Comment below with your thoughts: do you think Cathie Wood's views on these market forces will
play out in her favor? Will ARK Invest's funds see a huge rally in the second half of the year?
Why or why not? I'm excited to hear your thoughts.
Better information today means better investments tomorrow,
so I hope this episode helped you understand some of the indicators and trends Cathie Wood follows,
how they fit together, and their effects on her market outlook. If it did, let me know
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Until next time This is ticker symbol you,
my name is Alex, reminding you, that the best investment you can make is in you.