Cathie Wood believes innovation stocks are oversold and now sees deep value in disruptive innovation stocks. Cathie Wood’s Ark noted that common mistakes made by investors is to sell near the bottom of market cycles, which results in converting temporary losses and missing out on profits when the cycle turns.
Cathie Wood believes innovation stocks are oversold and represent long-term value
“ARK places significant focus on our five-year investment time horizon,” wrote Cathie Wood. “Our primary message is that innovation solves problems and is expected to transform human lives at an accelerated rate during the next five to ten years. We also reiterate that we take advantage of volatility during corrections and concentrate our portfolios toward our highest conviction stocks,” added Cathie Wood.
“innovation solves problems and is expected to transform human lives at an accelerated rate during the next five to ten years”
CATHIE WOOD
Put simply Cathie Wood believes innovation stocks are oversold and represent buying opportunities
“Year-to-date, our inflows have outweighed our outflows significantly, suggesting that on balance, investors understand our active management investment process and long-term investment time horizon,” wrote Cathie Wood.
Ark Invest’s flagship Innovation ETF has dropped more than 10% in December and is now down 23.7% for the year. Nevertheless, Cathie Wood believes ARK will bounce back in 2022.
“Historically and according to our research, this concentration of our portfolios during corrections has led to significant absolute performance and relative outperformance as the market rebounds. According to our current estimates, only one other time in ARK’s history, at the end of 2018, has our research suggested such an optimistic growth potential over the next five years,” wrote Cathie Wood.
“only one other time in ARK’s history, at the end of 2018, has our research suggested such an optimistic growth potential over the next five years”
CATHIE WOOD
Indeed, we would agree with Cathie Wood’s bounce-back view, regarding disruptive innovators.
If disruptive innovation stocks experience big price drops but continue innovating and growing, then these companies are likely to survive and prosper in the long term.
Amazon’s share price did collapse. After hitting a high of $600 in late 1999, the stock got annihilated, falling over 90% as the Dotcom bubble collapsed. But if an investor ignored Amazon’s over two decades and instead monitored the company’s evolution their small investments made in 1999 would be worth a fortune today.
“After correcting for nearly 11 months, innovation stocks seem to have entered deep value territory, their valuations a fraction of peak levels” – Cathie Wood
The crux of Cathie Wood’s belief that innovation stocks are oversold is that these stocks are riding a long wave of innovation, which typically lasts years
“In our view, the coronavirus crisis initiated a “rip and replace” cycle in the $1.5 trillion enterprise communications space, the first major product replacement cycle since the emergence of the internet roughly 30 years ago. We do not believe this shift was “temporary.” Stimulated by “stay at home,” this transformation has shifted to “stay connected” in a hybrid work world and “stay competitive,” wrote Cathie Wood.
Indeed, the hybrid world of work, the digitalization of everything, and electrification of mass transport and the robotization of repetitive tasks is a mega macro trend, and not a fad, that is likely to continue in a post-pandemic world.
“After correcting for nearly 11 months, innovation stocks seem to have entered deep value territory, their valuations a fraction of peak levels,” wrote Cathie Wood.
Cathie Wood believes investing in the broad-based index offers a false sense of security.
“Broad-based equity benchmarks could be in harm’s way because of disruptive innovation,” she wrote.
“Artificial intelligence training costs are declining at a rate of 60% per year. Provocatively, these platforms are converging, creating the potential for more dramatic cost declines as S-curves feed and reinforce one another. The convergence between and among robotics, energy storage, and artificial intelligence will create autonomous taxis and significant growth potential: by 2030, autonomous taxi networks could scale from no revenue today to $9-10 trillion globally, which, when combined with the productivity uplift from time freed up from behind the wheel, could total more than $20 trillion. For perspective, US GDP today is roughly $21 trillion. In other words, “good” deflation could result in outsized growth rates for those companies positioned on the right side of change,” wrote Cathie Wood.
“Unlike companies paralyzed by short-term oriented shareholders demanding their profits and dividends now, truly innovative companies are on the offensive” – Cathie Wood
Another reason Cathie Wood believes the innovation stocks are oversold, is that she sees deflation
We see both inflation in non-discretionary spending items like food, shelter, energy, and other necessities. Meanwhile, as household budgets are under pressure due to currency debasement inflation and falling real wages demand for discretionary spending will decline along with prices. We note Apple cutting production of its internet phone to adjust to falling demand underscore the above point. So companies offering discretionary services and products will either have to cut output or prices or both to maintain revenue going forward.
Cathie Wood sees her new age in five major innovation platforms evolving today: “DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technology. Unlike companies paralyzed by short-term oriented shareholders demanding their profits and dividends now, truly innovative companies are on the offensive,” wrote Cathie Wood.
But this new age, also known as the Fourth Revolution, is a period of creative destruction where investors are walking along a minefield. Is today’s market leader, which pays dividends tomorrow’s next Kodak or Rank Xerox? So investors have a false sense of security investing in large-cap, which are lazy innovators where their strength lies in monopolizing markets. But like lions in a jungle, they will someday encounter a more agile, faster, leaner, and younger cat that will one day outmaneuver them and win.
So Cathie Wood believes the innovation stocks are oversold, and maybe she has a point. Perhaps Wood’s Ark will be the comeback story of 2022.
