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In this article we discuss Cathie Wood's top 10 stock picks. You can skip our detailed analysis of Cathie Wood's investment strategy and go directly to Cathie Wood's Top 5 Stock Picks.
Ark Investment’s Cathie Wood has become one of the most popular hedge fund managers and investors, thanks to her successful bets on technology, EV companies, biotech and DNA sequencing. The 65-year-old is, however, facing a difficult time as tech stocks begin to lose value and small biotech companies in which Ms. Wood’s ETFs have big positions are posting heavy losses. According to data from FactSet, two main ETFs of Cathie Wood posted their biggest losses since the stock market’s crash of March 2020. ARK Innovation Fund is also down 5% over the last 30 days.
Why Is Cathie Wood's ARK ETF Suddenly Losing Value?
Rising bond yields and a much-feared correction for tech stocks are causing the latest troubles for Cathie Wood’s favorite stock picks. The 10-year Treasury yield ticked up 1.5% after Fed Chairman Jerome Powell in an interview showed no intention to hike interest rates.
High yields often hammer growth stocks. In a Yahoo Finance program in January, Charles Schwab’s strategist Kathy Jones had said that we should expect higher inflation down the road and also mentioned her outlook about growth tech stocks. Here’s what she said:
“We actually moved from Overweight to Neutral [on tech stocks] a couple of months ago. Mainly because valuations were so stretched and we thought that there was room for a correction.”
Cathie Wood's Dramatic Rise
With a bachelor’s degree in finance and economics from the University of Southern California, Ms. Wood started her career as an assistant at the LA-based financial services company Capital Group. After serving at senior positions at Jennison Associates, Tupelo Capital Management and AllianceBernstein, Ms. Wood founded ARK Investment Management in 2014 and quickly became successful due to her prescient investments in disruptive technology companies. ARK’s most famous Innovation ETF returned an impressive 152% in 2020, defying the struggling hedge fund industry and gaining Ms. Wood the best stock-picker of the year title from Bloomberg.
Cathie Wood talked about several important topics during a recent talk on her ARK's YouTube channel. We will mention some of the most useful commentary from the video.
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Cathie Wood on Monetary Policy
"With chairman Powell's testimony this week in front of congress, we see that the Fed is nothing but supportive. We see M2 growth still up in the mid-20s. A very rapid rate of growth. The chairman emphasized once again that they're focused on two things. Full employment, and we are far away from that. Then inflation, above 2% and consistently above 2% on a year-over-year basis. We are not there yet. We're in the 1.5% to 2% range so nothing right now suggests that the Fed is going to tighten except for maybe the markets themselves. We see other indicators perhaps calling for some changes at the Fed in terms of tightening up monetary policy. We see commodity prices really moving up very rapidly especially copper relative to gold. Copper is the commodity with the PHD as many people often say. Gold is more of the safe haven or inflation hedge. So to see copper going up that rapidly against gold suggests there are animal spirits out there. The dollar is going down, housing prices are moving up at a double-digit rate, which is pretty astonishing. We've seen very strong asset market prices when it comes to stocks, generally we're still up for the year even after the recent turmoil."
Cathie Wood on Value Stocks
"When president Trump was elected, value stocks took-off just like they're taking off now, responding to this idea that this economy is developing ahead of steam. So the value stocks have taken off and in fact if you look at year-to-date, I think financial stocks are up 11%, and energy stocks are up 27%. I think technology stocks, if I'm not mistaken are up basically 1% and health care, which is another area to which innovation strategies are exposed. Traditional value stocks are having a nice run here and how do we feel about that? We feel really good, just like we did in 2016 when we said value is up. Actually the market was up, value up even more, and growth strategies like ours were down... What would be very negative for innovation-based strategies is if the market continued to narrow. Only innovation strategies worked because that's what happened during the tech and telecom bubble."
"Treasury Secretary Janet Yellen in the last two weeks, has gone out of her way in an answer to telegraph how speculative Bitcoin is and how it's not environmentally friendly or sustainable, and how it helps elicit activity or encourages. I'm not quite sure why she's saying this. All I know is that she does not understand the crypto space. I say this with all due respect. I just don't think it is what she does. She's responding to a movement in price that I understand, which has been very rapid. Think about it. I think up five-fold, since the end of the third quarter. That's pretty extreme so I can understand her saying that... If you compare the energy use of Bitcoin in particular compared to the energy it would take to mine gold, for bitcoin is digital gold. It's a fraction of it. If you want to think about it a little bit more broadly because the Bitcoin blockchain and other blockchains are going to enable much more rapid settlement of trades and transactions than the traditional financial institution... I think the most important thing that we as investors need to do is be very supportive of those who are evolving this ecosystem. We at ARK are thinking about ways to help the community in terms of bitcoin developers to secure the network. It is right now the most secure blockchain technology out there, and so for a very high value transaction, think a million dollar transaction, it does take 10 minutes and that seems to be a complaint and it is a complaint relative to other blockchains that involve smart contracts that are instantaneously settled... Our confidence in Bitcoin and the block bitcoin blockchain has continued to grow over the years."
Cathie Wood on Electric Vehicles, DNA, Good and Bad Deflation
"As we've told you before in the electric vehicle space for example, that deflation rate is 28% for every cumulative doubling in the number of units produced. We're only 2.2 million units of EVs right now. It's not going to take long to double that 2.2 million units. In the DNA sequencing space, it's 40% for cumulative for every cumulative doubling and we're at a very low base there as well. Those low bases are going to move up pretty quickly. We think electric vehicle sales will move from 2.2 million to 40 million, almost 20-fold increase in the next five years, but they're at a low base right now and they will only begin to impact economic statistics as they scale during the next few years. In the meantime, what's going to happen there, this disruptive innovation is going to cause creative destruction in the traditional world order. It's not just electric vehicles and DNA sequencing, it's robotics, artificial intelligence, blockchain technology. There is so much innovation taking place right now and I don't think that investors appreciate how these S-curves are feeding one another as these innovations converge. The best example of that, we believe will be autonomous taxi networks, the convergence of robots, autonomous vehicles are robots. Energy storage, they will be electric. That's going to be the cheapest form of transportation and artificial intelligence... The bad deflation is associated with the disintermediation and disruption to the traditional world order. It's going to put a lot of companies who thought they were steady at ease, and nothing would ever change, whether it's in the financial services sector or the auto related sector and maybe the rail sector. Almost any company associated with the internal combustion engine and suppliers around. These are massive parts of the economy. Many of those companies have adopted short-time horizons themselves and catered to these shareholders. They have consistently leveraged up to buy back their shares and pay dividends. We're seeing the result in 'informally' blue chip stocks. GE is one, IBM is another. There are going to be many more of these. Many are highly leveraged because they did not understand how quickly the world was going to evolve. In fact their time horizon was not five or ten years. It was two years or until then the end of the CEO's term. What's going to happen, we believe is they are going to be forced to cut prices in order to service their debt. So that's the bad deflation... Then we have this question about how money will cause inflation. I don't know. I would say these two deflationary forces are pretty wonderful in the short-term. They're going to cause a lot of confusion and it's somewhat esoteric. All it means is, the rate at which money turns over if there's a lot of confusion, will continue to fall. The reason that the monetary easing globally during the 2008 and 2009 meltdown and afterwards, it never ignited. Inflation was this velocity, the money went up, but the rate at which it turned over per year in the economy slowed down as people held back, they were risk-averse, concerned about their futures, concerned about their company's futures. I think that probably will continue as these dueling deflationary forces, good and bad, duel with one another."
Cathie Wood has really surprised the markets with her sterling gains, because overall, the hedge fund industry is apparently struggling. Its reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 111 percentage points since March 2017. Between March 2017 and February 5th 2021 our monthly newsletter’s stock picks returned 187.5%, vs. 75.8% for the SPY (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start our list of Cathie Wood's top 10 stock picks.
10. Spotify Technology S.A. (NYSE: SPOT)
Value: $741,445,000 Change in Position Size: 110% Percent of Cathie Wood’s 13F Portfolio: 2%
Spotify is a Sweden-based audio content company which boats a subscriber base of about 155 million as of the end of 2020. As of the fourth quarter of 2020, the company had 345 million monthly active users, up 27% from last year. However, average revenue per user fell 8% to $5.13 in the period, mainly because of discounts and the company’s foray into new markets like Russia.
With a $741.4 million stake in Spotify, ARK Investment Management owns 2.4 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 48 hedge funds held stakes in SPOT at the end of the fourth quarter, versus 44 funds at the end of the third quarter.
Guardian Fund, in their Q4 2020 Investor Letter, said that they acquired a position in Spotify Technology S.A. (NYSE: SPOT) because they believe that the company has a long runway of growth ahead. Here is what Guardian Fund has to say about Spotify Technology S.A. in their investor letter:
"At the current share price, Spotify basically only represents a fraction of the value they will be able to unlock in the growing market of audio entertainment. The key for Spotify is to change a variable cost base into a fixed cost base just like Netflix has. As the market share of the big labels, measured by the daily hours of engagement of the big labels, is declining, Spotify will be able to adjust its business model and create enormous operational leverage meaning that profitability will grow faster than expenses.
The music catalogue is not the business model. The value lies in the machine learning that drives discovery and engagement, the original content from people like Michelle Obama, Kim Kardashian, and Joe Rogan, the data analytics and distribution for artists, the direct and social relations artists can have with fans through music and videos. We believe that Spotify will be worth at least five times more in 2030.”
9. Twist Bioscience Corporation (NASDAQ: TWST)
Value: $830,357,000 Change in Position Size: 86% Percent of Cathie Wood’s 13F Portfolio: 2.2%
Ranking 9th on the list of Cathie Wood's top 10 stock picks is DNA and biotech company Twist Bioscience. The company makes synthetic DNA for clients in the biotechnology industry. It makes hardware like chips and robotics technology services, as well as software for biotech companies. In 2016 the company bought Israel-based software company Genome Compiler, which makes software to design synthetic DNA.
The stock is up 245% over the last 12 months.
As of the end of the fourth quarter, 23 hedge funds in Insider Monkey’s database of 887 funds held stakes in TWST, compared to 21 funds in the third quarter. Cathie Wood's ARK Investment Management is the company’s most significant stakeholder, with 5.9 million shares worth $830.4 million.
8. Zillow Group, Inc. (NASDAQ: Z)
Value: $841,260,000 Change in Position Size: 32% Percent of Cathie Wood’s 13F Portfolio: 2.2%
Zillow is one of the biggest real estate services companies in the U.S., offering web and mobile services to facilitate renting, buying and home financing. The company is operating Zillow, HotPads, Trulia, StreetEasy, Naked Apartments and RealEstate.com. Zillow shares recently gained value after the company posted better-than-expected Q4 results. The company said traffic to its mobile apps and websites reached 201 million average monthly unique users, a record.
There were 83 hedge funds in our database that held stakes in Zillow Group at the end of the fourth quarter, compared to 69 funds in the third quarter.
7. Pure Storage, Inc. (NYSE: PSTG)
Value: $930,656,000 Change in Position Size: 61% Percent of Cathie Wood’s 13F Portfolio: 2.5%
Pure Storage ranks 7th on the list of Cathie Wood’s top 10 stock picks. The company makes all-flash data storage hardware and software products. In February, KeyBanc reiterated its Overweight rating on Pure Storage and upped its price target to $32 from $23, citing upbeat earnings and strong demand. Credit Suisse also recently increased its price target for the stock to $21 from $18 citing the most recent quarterly results. The firm said the company’s momentum is expected to continue through 2021.
According to our database, the number of PSTG’s long hedge funds positions decreased at the end of the fourth quarter of 2020. 21 hedge funds hold a position in Pure Storage by the end of December, compared to the 22 funds in the third quarter. The company’s biggest stakeholder is ARK, with 41.2 million shares worth $930.7 million.
6. Invitae Corporation (NYSE: NVTA)
Value: $1,128,918,000 Change in Position Size: -3% Percent of Cathie Wood’s 13F Portfolio: 3%
Ranking 6th on the list of Cathie Wood’s top 10 stocks picks is Invitae, a DNA processing and genetic sequencing company. The stock is up 93% over the last 12 months. In February, Oppenheimer analyst Kevin DeGeeter downgraded the stock to Perform from Outperform. In the fourth quarter, Invitae’s losses increased by 85% on a year-over-year basis. However, the company reiterated its outlook for revenue growth targets of 50%-60% for the next few years.
As of the end of the fourth quarter, 35 hedge funds in Insider Monkey’s database of 887 funds held stakes in Invitae Corp., compared to 24 funds in the third quarter. ARK Investment Management is the company’s biggest stakeholder, with 27 million shares worth $1.1 billion.
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Disclosure: None. Cathie Wood's Top 10 Stock Picks is originally published on Insider Monkey.