Cathie Wood’s ARK Innovation Fund (ARKK), which is essentially a basket of some of the most speculative high-growth tech stocks, took a massive hit to the chin this week. The drop further punished beginner investors who chose to double down on the biggest winners of 2020.
Undoubtedly, the market has been unforgiving to many market newcomers who chose to chase performance in hot investments like ARKK. Rather than hand-selecting stocks with wide margins of safety that were priced well below their true worth, investors were drawn in by ARKK's promise of high growth.
With the tables now turned, value is outshining growth in a big way. Some investors are learning a hard lesson: chasing past performance can be a dangerous game.
As that famous warning expresses so succinctly, “Past performance is not indicative of future results.”
Speculative Tech Wreck
In 2021, the market served up an unforgiving growth-to-value rotation. Climbing bond yields and inflation jitters sent shockwaves through the market back in the first quarter, sending shares of many growth darlings lower.
The higher the growth—and the more expensive the name—the harsher the penalty.
The shockwaves from the speculative tech wreck were not felt evenly across the market, though. Many value investors still insisted on margins of safety over growth at any price. They likely did not feel the pain that other investors contended with in recent months.
While the broader Nasdaq 100 was quick to climb back from its first-quarter correction, some of the more speculative growth stocks remain considerably off from their highs.
Cathie Wood's ARKK ETF is Sinking
Cathie Wood’s ARKK ETF has felt the brunt of the damage amid speculative tech's latest bout of weakness. Wood’s innovation-focused fund put the S&P 500 to shame last year, but now, her funds are under considerable pressure. They could be at risk of surrendering even more of last year's impressive gains that put the ETF on the map.
The wildly popular ARKK ETF now finds itself down around 33% from its February 2021 all-time high. Those who picked funds and stocks based on past performance, were dealt a significant blow. Furthermore, there is no telling how much lower ARKK and speculative tech will sink. ARK funds are no longer amplifying the downside in the Nasdaq 100; it’s moving lower on its own trajectory.
Cathie Wood seems unrattled by recent weakness in speculative tech. In fact, she’s treating the sell-off in growth stocks as a great opportunity to buy more shares of her favorite companies. Recently, Wood capitalized on one of the worst weeks for social media stocks by picking up 1.3 million shares of Twitter (TWTR), while they were fresh off a 15% plunge.
Nobody knows if Wood’s ARK funds will sink to their early 2020 lows or recover alongside the less speculative basket of profitable growth stocks featured atop the Nasdaq 100.
In any case, Cathie Wood is staying the course. As she continues to double down on the most battered of speculative tech stocks, ARKK could stand to ricochet massively once growth hits bottom.
Is it Wise to Follow Cathie Wood?
As the discrepancy between ARKK and the Nasdaq 100 widens amid growth’s latest pullback, Cathie Wood fans and courageous beginners would be wise to grasp a full understanding of the downside risks.
That said, just because a stock’s valuation metrics are high does not necessarily mean it’s ridiculously overvalued.
Some of the oversold growth names may actually be undervalued relative to their long-term growth prospects, even considering the likelihood of much higher rates over the medium-term. That's what Cathie Wood is betting on, as she continues buying hard-hit tech while others sell.
Wood may be right in her aggressive buying spree strategy right now. Just be ready to average down in the case of a future price drop.
Disclosure: Joey Frenette held no position in any of the stocks or ETFs mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
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