In this article we talked about Cathie Wood's recent comments about money supply, inflation, interest rates, bitcoin and present Wood's top 10 small-cap stock picks. Click to skip ahead our lengthy discussion and see Cathie Wood's Top 5 Small-Cap Stock Picks.
"The year has certainly started off in a wild way." ARK Investment Management's CEO, Cathie Wood, said that for this year, she will be focusing on capital gains, tax rates and the corporate tax rates following the sweep of the democrats into both the house and the senate. "I think they will go up and that will not be good," said Wood talking about the taxes in a market update webinar of ARK Invest.
As of today, Wood stated that the market seems to be focusing on the odds that America will have at least another trillion dollars of stimulus and that the bull market is already broadening up. "I can say I was wrong about what I believe the impact on the stock market was going to be in the short term," she admitted while saying that they were correct however about their assumptions on the V-shaped recovery that is caused by the wobbles of the resurgence in the coronavirus' infection and fatality rates. "The bull market is broadening out with cyclicals joining the party and actually, we're very gratified to see that," she stated.
"We think we're in a very strong recovery on balance with the occasional wobble as we negotiate the coronavirus. We think there could be an earnings explosion". Wood marked that they are already noticing the surprises relative to their expectations and she emphasized that these were the 'biggest surprises' she has ever seen in her entire career.
Just last year, the S&P 500 delivered $100 in earnings on average, and with the momentum that the market has today, accordingly, it could achieve up to $200 earnings at the end of 2021.
The treasury yields in the final week of 2020 were breaking out above 1%, and that represents the 10-year treasury bond yield. "Most bond observers and investors I think, have been surprised at the power of the move through 1%. This seems to be breaking a long-term trend that many thought would not be broken for quite some time," she stated, explaining that this belief is due to the Fed's current monetary stance. One of the facts here is that the treasury bond yield is moving very rapidly through a key resistance point from the bond investors' point of view that kept them wondering what could possibly be the reasons for it. Cathie Wood marked that this unusual move in the capital markets left the people confused because the valuations have gone too far and the long-term interest rates are also moving up which tends to be a dampener on the valuations. "Certainly, 1% does not sound like a high number but it is breaking a trend.".
According to Wood, it was a surprise for every investor that the M2 was up 26% on a year-over-year basis since this one never happened before. It can be pointed out that M2 is the quantity of the overall money supply that involves checking deposits, cash, and other financial figures. "The 26% growth in M2 is taking on a new meaning, causing a lot of other questions. If we are right on both the magnitude of the cycle ahead and the fears associated with commodity prices rising and the dollar falling, we do believe that the Fed is going to have to reassess its plans.", Wood stated while noting that early indicators such as the dollar moving down while copper prices are up 75% is an indication that we will be able to see higher inflation than what most people had expected. "We think it's more of a cyclical variety supply getting back in line with demand and that it will not become endemic," she said.
ARK's CEO expressed that the deflationary undercurrents associated with the innovation platforms and technologies that are evolving at the same time now are going to become quite powerful as electrical vehicles, and collaborative robots are already starting to proliferate. "They're not at a high enough base yet to move the needle dramatically during the next few years and get to the base where that deflationary pull really will be felt by the markets," she remarked.
"If the Fed does reassess, that would be good news on our part. I know a lot of people would become quite concerned because it is a change since nobody likes change". Wood mentioned that they expect some fear as the fed begins to change its stance on fiscal policy. "We do expect another trillion dollars. We hope that it will be targeted.-- But once we're through shoring up those who have been devastated by this coronavirus, we don't think that the economy needs any more stimulus" said Wood. She highlighted that there is currently a powerful signal that the stimulus will lead to nothing but higher taxes and probably will be much more wasteful.
One of the policy priorities of the Biden administration is infrastructure and according to Wood, this can be an opportunity for Biden to bring the Democrats and the Republicans together since there is bipartisan support for this policy. "I believe that the policies of President Biden are going to be somewhat more conciliatory than many expect," said Wood.
In terms of healthcare, Cathie Wood thinks that the Biden administration will keep healthcare as a priority by pushing to keep the drug prices down. She said that everyone wants an accelerated approval of breakthrough therapies for various diseases or illnesses.
Clean energy is also one of the priorities of the new administration and for Wood, both the Republicans and the Democrats are beginning to understand that the cost of technologies like electric vehicles is decreasing and this type of technology is ready to be used by the public. "This has not been true for years and years, so the government had to subsidize these areas in order to jumpstart them," she said.
"The most damaging part of his purported proposals are increased tax rates". Wood said that a higher marginal tax rate has not been a great strategy for former administrations. "The administrations in the past who have tried to do that have found the tax base would disappear on them.-- We're seeing a migration to low-tax states that is very visible on both coasts". Cathie Wood stated that if the administration will continue to raise capital gains tax rates, corporate taxes, and increase the regulations, we will probably see a migration of innovative companies and creative people to other parts of the world. She also marked that ARK's strategies are global in scope so if ever these companies will move to a different country, then ARK will still follow and invest in these businesses. "We are hoping that this does not become a trend but we do believe it is a risk as far as economic indicators are concerned".
"We described the coronavirus crisis as more of a shock to the system as opposed to a full-blown recession which would spiral into a depression as the economy shut down". Accordingly, capital spending has been soaring and has caused shortages in all kinds of supply chains, and that manufacturers are still trying to scramble and catch up in today's unemployment report. "Some of the economists that pay a lot of attention did not mention that if you parse through the reports, you can see that manufacturing hours were stronger than expected and that manufacturing overtime hours went up. So this still tells us that manufacturers are scrambling to catch up with the housing market, the auto market, and even with China because China has also gone through a V-shaped recovery and even Europe despite the coronavirus," she uttered.
Cathie Wood also talked about something unusual in the average hourly earnings, "One other thing in the employment report that was very interesting was average hourly earnings, increased 0.8%. I don't remember seeing a number that high except in the late 70's and early 80's when inflation was in the double digits on a year-over-year basis". She proclaimed that the average hourly earnings are growing by 5.1%. In terms of the GDP in the 1st quarter of this year, she said that it will be depending on the government's stimulus. It becomes evident that the equity market is a leading indicator for the economy, "The cyclicals, they're picking up nicely and so that gives us great confidence that we're still on the right track".
"Inflation really continued to surprise on the low side of expectations in the 1% to 1.5% range and a lot of people think that inflation is dead." Wood shared her experience back when she was new to the field in the early '70s when a lot of people back then thought that inflation was dead, when all of a sudden, the 1973 inflation kicked up royally as OPEC cut production and oil prices quadrupled. "That was the beginning of the unhinging around the U.S. going off the gold exchange standard.-- I would say the monetary policy does not seem to be hinged to anything and so there are inflation risks out there with money growing at 26%". As for Wood, the question is that, will people's money be saved so that velocity keeps going down or will we evolve into a psychology where consumers and businesses see inflation and that interest rates starts to creep up? "People would say, 'why don't I do this or do that before inflation and interest rates continue to move up?'. If that were to happen, then we would have an inflation problem," she stated while also adding that it is the same as the saying that the velocity of money would be picking up as people try to get rid of their dollars as quickly as possible in order to buy goods and services before these essentials and interest rates go up. She said that if the money continues to move into asset markets, then the velocity of money will continue to fall and it will take the risk out of that 26% growth rate.
Long-term interest rates particularly the risk-free ones that are breaking above the downtrend lines are very interesting in Wood's opinion. For her, buying the dip was always the thing to do in bonds, until today. "When bond prices went down or interest rates went up, you should have bought bonds, but that may not be the right thing to do anymore.-- We're seeing the yield curve steepen, that means long rates are going up but short rates are not because the Fed is holding them down and this is usually good for financial stocks," she said, and accordingly, financial stocks had a very nice run recently but they are misbehaving today.
Wood also mentioned the credit spread, the difference between junk bond yields and investment-grade yields that have narrowed but with the exception of the commercial real estate market. "When you see OPEC cutting back production, you see Exxon shutting down production and writing down assets, what we believe will happen is we're going to be in a period of extreme volatility in oil prices.-- We're going to continue to see lower highs but we'll see extreme volatility, if we're in a V-shaped recovery, we will continue to have a bit of a burst in oil prices. Secularly though, thanks to electric vehicles, the trend (of oil) is down and that trend will remain in place".
Another asset that Cathie Wood talked about was the dollar. "The dollar dropped roughly 7% last year so we in the United States lost 7% in purchasing power relative to other currencies around the world". America also lost a bit to inflation but however, inflation is low and may even be overstated because the statistics don't capture the digital economy and the deflationary impact of it as well. "But if it does break down from here, the dollar will be a major breakdown if you just look at a long-term chart, it will force the Fed to reassess its position," said Wood.
Talking about Bitcoin, it has doubled in the last month and was able to successfully cross its 20,000 peak from the year 2017 and has gone to 40,000. "Usually when there's a parabolic move like Bitcoin enjoyed in 2017, it usually takes a generation for that asset or that stock to get back to that peak," Wood said while she also noted that by generation, she means around 10 to 20 years and the fact that this was achieved by Bitcoin in just around 3 years, is a very rare event. "I think part of this or the follow-through might have been triggered by again the bond yield pushing, doing what many people did not expect it to do. Have we made mistakes in monetary and fiscal policy that we are going to pay for in the future?-- Most of us would say one of the ways typically is that 'inflation inflating our way out of government debt'", marked Cathie Wood.
According to Wood, the preferred way at ARK of addressing this issue is to grow their way out of problems with innovation so they are going to keep advocating for that and also to advocate against inflation because it is the 'most regressive tax of all'. "I believe there is no better hedge against inflation than Bitcoin.
As we know, gold has been moving, although now it's lagging Bitcoin fairly dramatically so there's probably some share shift but I do believe that both of them will do well over time". Wood shared that there are in fact big companies asking her, is it good to put their large sum of cash in Bitcoin or other cryptocurrencies, just like what the mobile payment company, Square Inc. has done? "I think we're going to hear about more companies putting this hedge on their balance sheet as well particularly tech companies who understand the technology and are comfortable with it".
Wood quoted OCC's Brian Brooks who said that public blockchains can be used for the settlement of transactions and banks can become its nodes. "That was like a bolt of lightning! I just never expected it and I don't think anyone else did either except for some in the crypto world who were working closely with the regulators.", she exclaimed. This validation will help the banks cut their costs. "This is a very exciting development and it certainly is getting everyone to study and learn much more about cryptocurrencies, blockchains, and other crypto assets.-- From an innovation point of view, we think we have miles to go. This is just the beginning".
ARK's Cathie Wood has been in the business for more than 40 years and according to her, she couldn't be more excited about all of the innovation taking place today and that she thinks wonderful days are ahead for the exponential growth trajectories that are going to deliver superior investment returns. "No matter what the environment is, we will have to go through ups and downs.-- I'm sure we're going to go through a doozy of a correction this year and at some point, I don't know when and I don't know why but I do know that it never hurts to take profits and to keep some powder dry so that you have the 'psychological wherewithal' when the world seems to be falling apart to pick up on bargain-basement prices," she concluded.
According to the description of ARK’s official website, “ARK Investment Management is a registered investment adviser in the U.S. Securities and Exchange Commission. Founded by Cathie Wood, ARK’s goal is to focus solely on disruptive innovation while adding new dimensions to research. ARK uses an approach that cuts across sectors, market capitalizations, and geographies”. ARK focuses on large-scale investment opportunities in the public markets resulting from technological innovations centered around DNA sequencing, robotics, artificial intelligence, energy storage, and blockchain technology. Several of Cathie Wood's stock picks delivered very large gains in 2020 and these stocks moved into the mid and large-cap category. In the rest of this article we are going to take a look at Wood's small-cap stocks which we believe offer potentially larger gains.
Here are Cathie Wood's top 10 small-cap picks with a market capitalization of less than $5 billion:
10. HUYA Inc. (NYSE: HUYA)
ARK's Overall Allocation Rank: 32nd Market Cap: $4.962B
Huya Inc. is a China-based live streaming game platform that accommodates a huge live streaming community. The company focuses mainly on E-Sport events but also caters to a variety of content genres such as talent shows, anime, and other outdoor activities. The company aims to further expand and capitalize on the fast-growing live streaming market in China.
Ranked 10th in our list, Cathie Wood acquired 7,834,947 shares of HUYA Inc. with a value of $187,647,000 which equates to 1.11% allocation from their total equity. The company's market capitalization is currently worth $4.962 billion and delivered a massive 334% return since being acquired by ARK. Here is what Tao Value said about HUYA last year:
“Huya (ticker: HUYA) dragged -60 bps for our portfolio during the quarter. Its core e-sports streaming is facing intensifying competition from a few strong newcomers. For example, Bilibili (ticker: BILI) obtained exclusive broadcasting rights for League of Legend World Championship. Given this observation, I estimate the path to profitability for the e-sports streaming industry would be prolonged, yet Huya is and can remain the industry leader.”
9. Cerus Corporation (NASDAQ: CERS)
ARK's Overall Allocation Rank: 31st Market Cap: $1.22B
Cerus Corp is a biomedical products company that is attached to flourishing and innovating its benchmark, 'INTERCEPT Blood System', which is coined from the company's blood safety courier services. Cerus Corp is a global company that is an advocate of blood safety and commits to make blood available to anyone who will be needing it for the improvement of people's health status.
With a market cap value of $1.22 billion, there are currently 30,000,071 shares of CERS in the portfolio of Wood which amounts to $187,800,000 in value that is equivalent to 1.11% of their total equities. CERS is ranked 9th in our list of Cathie Wood's top small-cap picks.
8. Veracyte, Inc. (NASDAQ: VCYT)
ARK's Overall Allocation Rank: 24th
Market Cap: $2.988B
Veracyte, Inc. is one of the leading genomic diagnostics companies in the world that focuses on providing tests to ill patients and generates reliable, actionable, and near to perfection answers that give accurate information regarding the condition that the patient may have.
According to Veracyte, "Our tests leverage innovations in genomic technology and machine learning to enable more confident diagnostic, prognostic and treatment decisions in challenging diseases such as thyroid cancer, lung cancer, breast cancer, and idiopathic pulmonary fibrosis. We are creating new standards of care by enabling more patients to avoid unnecessary invasive procedures, speeding time to diagnosis, and treatment while removing costs from the healthcare system.".
Cathie Wood successfully procured 7,018,770 shares of Veracyte which means, she allocated 1.35% of her total equities to this company which equates to $228,040,000. She was able to get a 39% increase in terms of returns since her acquisition of this stock that has a Market Cap value of $2.988 billion.
7. Materialise NV (NASDAQ: MTLS)
ARK's Overall Allocation Rank: 23rd
Market Cap: $3.814B
Materialize NV is one of the pioneers in the 3D printing manufacturing sector. They work with companies by managing and enhancing their whole digital manufacturing workflow by giving them efficient and quality outputs. The company also works with researchers, engineers, and clinicians in making products that contribute to the betterment of society as a whole and products that save and improves the quality of life.
With a 1.38% allocation, Materialise NV's 6,319,679 shares in Cathie Wood's portfolio, equates to $233,259,000 worth of equities and was able to deliver a decent 33% return since being acquired.
6. Compugen Ltd. (NASDAQ: CGEN)
ARK's Overall Allocation Rank: 17th
Market Cap: $1.106B
The number 6 on our list is the small-capped Compugen Ltd. that has a market cap value of $1.106 billion. According to CGEN, "Compugen is a clinical-stage drug discovery and development company with a unique, broadly applicable, predictive discovery infrastructure, which is advancing a therapeutic pipeline consisting mainly of early-stage immuno-oncology programs, aimed at harnessing the immune system to eradicate cancer. Our pipeline is based on novel Compugen-discovered drug targets, primarily immune checkpoint candidates that are predicted to provide cancer immunotherapies addressing unmet cancer types and patient populations, both as monotherapy and in combination.".
Wood was able to acquire $287,174,000 worth of shares of CGEN. This 17,672,228 number of shares equalize to 1.17% of ARK's total equity value. Since being acquired, Compugen was able to deliver a 26% return to the fund.
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Disclosure: None. Cathie Wood's Top 10 Small-Cap Stock Picks is originally published at Insider Monkey.