ARKK: Cathie Wood Sticks To Her Guns Despite Massive Implosion

May 23, 2022 4:48 PM ETARK Innovation ETF (ARKK)COIN, CRSP, TDOC, TSLA, ZM, EXAS, SQ, PATH, TWLO, ROKU76 Comments3 Likes

Summary

  • ARKK has continued its massive downward move despite its implosion in 2021. It has lost 56% YTD as its underlying stocks underperformed the market.
  • ARK Invest CEO Cathie Wood has maintained her high level of conviction, despite ARKK's significant underperformance. Furthermore, ARKK has seen net inflows of $1.5B in 2022.
  • Our price-action analysis suggests a near-term bottom. However, a potential re-test of its COVID bottom could be in store. Therefore, we will watch its re-test first.
  • As such, we revise our rating from Buy to Hold while observing its re-test.
  • Looking for a helping hand in the market? Members of Ultimate Growth Investing get exclusive ideas and guidance to navigate any climate. Learn More »

Bitcoin 2022 Conference Draws Cryptocurrency Industry Professionals And Investors To Miami

Marco Bello/Getty Images News

Investment Thesis

ARK Innovation ETF (NYSEARCA:ARKK) has continued to disappoint its long-term holders (including us) as the bearish momentum has unhinged speculative growth stocks. We presented in our previous article that its bubble has been burst. However, the market makers did another astute trap in April, which sent the ETF further down in the May sell-off.

However, we must highlight that our holdings in ARKK comprised just 1.5% of our total portfolio average cost. While it has made a disappointing round trip from our initial purchase, it has not impacted our portfolio significantly. As a result, we continue to stay vested despite its near-term challenges.

Notwithstanding, our price action analysis suggests that the ETF is at a critical juncture as it last traded above its COVID bottom. Therefore, we suggest investors wait for a successful re-test of its COVID bottom before adding exposure.

Consequently, we revise our rating on ARKK from Buy to Hold as we wait for the re-test.

Nine Of Ten Holdings All In A Downtrend

ARKK top ten holdings (part 1/2)

ARKK top ten holdings (part 1/2) (koyfin)

ARKK top ten holdings (part 2/2)

ARKK top ten holdings (part 2/2) (koyfin)

It's easy to see why ARKK is down a massive 55.7% YTD, as it underperformed the market. A closer look at its top ten holdings indicates that all of them sans Tesla (TSLA) stock are in a downtrend. Therefore, fighting against the market forces is impossible when your underlying holdings are getting squashed. ARKK's best performer is CRISPR (CRSP) stock, with a YTD return of -27.8%. Its worst performer is Coinbase (COIN) stock, with a YTD performance of -73.1%.

As a result, investors shouldn't be surprised that ARKK has been unable to stage a sustained recovery from its downtrend bias.

Cathie Wood Kept Adding To Her Losers... Quite Stunning

COIN price chart

COIN price chart (TradingView)

ARK Invest CEO/CIO Cathie Wood's most recent significant dip-buying was on COIN stock. Bloomberg reported ARKK added a total of 860K shares recently, as Coinbase crashed after a disastrous FQ1 earnings report (we discussed in a recent update).

Despite its weak moat and unsustainable profitability, we didn't expect ARKK to add so aggressively on COIN stock. Furthermore, the stock is mired in a significant downtrend, even though it should be at a near-term bottom after an enormous capitulation move.

TDOC price chart

TDOC price chart (TradingView)

A few weeks before Coinbase's earnings release, ARKK added heavily into Teladoc (TDOC) before its slated earnings card. But, we alerted investors not to add TDOC stock heading into its earnings as we were concerned that its revenue guidance could be at risk, given the macro headwinds.

We were also skeptical about management's outlook before its earnings card, which we thought did not account sufficiently for the risks of a pullback in corporate healthcare spending. Therefore, you can say that we were utterly stunned that ARKK added TDOC aggressively right before its disappointing earnings.

"Live Or Die" With ARKK - There's No Other Way To Understand

Cathie Wood's steadfast commitment to her "disruptive innovation" strategies can be mind-boggling. Because, as ARKK holders ourselves, we have also been stunned by the timing of her purchases.

However, the ARK Invest CEO has continued to demonstrate a high level of conviction, despite an apparent implosion of ARKK from the highs of February 2021 to the current lows. Even we found it challenging to express optimism in her selections at times. But, perhaps some investors have found her conviction levels something of a charm. The ETF Store (an advisory firm) articulated (edited):

Cathie Wood has not wavered at all in her conviction in her strategy, and in fact, has doubled down on her strategy. That's attractive to a certain segment of investors. Investors know exactly what they're going to get and can rely on its funds to make pure-play trades on innovation. The benefit of Cathie Wood not wavering from her strategy during this brutal downturn is that I think it will help the longer-term viability of ARK. - Bloomberg

That observation from an advisory firm is interesting. Because ARKK has pulled in net inflows of $1.5B in 2022 despite its hugely underwhelming performance. Therefore, investors need to recognize that there are other investors in the market who continue to put their faith in Wood's framework. Despite the round-tripping for investors from the 2020 vintage, these investors may not be concerned.

Price-Action Suggests A Near-Term Bottom

ARKK price action

ARKK price action (TradingView)

A series of bull traps after its 2021 top reflected the downward bias of many of its underlying stocks. Therefore, we can understand why the concentrated bets on disruptive technology stocks is an inherently volatile strategy, at least in the near term.

Furthermore, ARKK's momentum is decisively bearish, as it continues to be in "negative flow." Nonetheless, we observed that it's consolidating at a near-term bottom. However, we believe that it could rally into its near-term resistance before falling to re-test its COVID bottom.

Is ARKK ETF A Buy, Sell, Or Hold?

Although we think ARKK's bubble has been burst, there has been no stopping of its pain because of some contentious purchases recently. But, we have continued to hold on to ARKK, given our small exposure. Therefore, it's highly manageable, and we don't find its volatility or poor performance particularly worrying.

We also view it as a hedge against our conviction because we could eventually be wrong about Coinbase or Teladoc. If ARKK turns out to be right over the long-term, at least we have managed to participate, despite our small exposure. But, if we are looking for multi-bagger gains, even a little exposure is meaningful.

Notwithstanding, we revise our rating on ARKK from Buy to Hold. We believe the ETF could rally into its near-term resistance before re-testing its COVID bottom. Therefore, we will closely watch its potential re-test before updating our rating moving forward.

Do you want to buy only at the right entry points for your growth stocks?

We help you to pick lower-risk entry points, ensuring you are able to capitalize on them with a higher probability of success and profit on their next wave up. Your membership also includes:

  • 24/7 access to our model portfolios

  • Daily Tactical Market Analysis to sharpen your market awareness and avoid the emotional rollercoaster

  • Access to all our top stocks and earnings ideas

  • Access to all our charts with specific entry points

  • Real-time chatroom support

  • Real-time buy/sell/hedge alerts

Sign up now for a Risk-Free 14-Day free trial!

This article was written by

JR Research profile picture
14.23K Followers
Sifting through the ultimate growth stocks for your portfolio

I'm Jere Wang, the principal analyst and founder of JR Research and Ultimate Growth Investing Marketplace service.

Ultimate Growth Investing is curated to help investors achieve 5x to 10x returns over the next five years. 

As a growth-oriented investor myself, I am aware of the challenges investors face in their quest to find the right growth stocks. There are so many high-potential companies in the market. As these are emerging leaders, the due diligence required is even more crucial. All growth investors want multi-bagger returns. Unfortunately, most could hardly find the time to do the necessary work. 

Therefore, our service is here to help these investors. We are full-time investors and traders. We work day-in, day-out to find the best opportunities for ourselves. Now, we are extending those opportunities to these investors through the service. 

If you also prefer someone to do all the hard work for you, I invite you to try out our service. 

Subscribe right now because you get to try out the service for 14 days FREE. Seeking Alpha's unconditional guarantee also protects your free trial. 

Your billing only starts after the free trial. So there's absolutely no risk at all for you to subscribe. Upon subscription, you will have access to all of our investing resources. You will also have access to our Growth Portfolio.

Come and join our community of investors as we navigate the ups and down of the market together. All our best ideas are shared only with our community in the service. Hence, you will not be able to find them on the free site. 

If you have any questions, feel free to send me a direct message. I'm here to help. 

I look forward to connecting with you in Ultimate Growth Investing soon!


More About Me:

I was already a full-time investor and trader before I joined Seeking Alpha as a contributor. I enjoy sharing my experience, knowledge, and mistakes with fellow investors who don't have time to look at the market. It is not a part-time job that I do on the side. I depend on what I do for a living. I take these responsibilities very seriously.

I was previously an Executive Director with a global financial services corporation. I graduated with an Economics Degree from National University of Singapore [NUS]. NUS is Asia's #1 university according to Quacquarelli Symonds [QS] annual higher education ranking. It also held the #11 position in QS World University Rankings 2022.

I'm also a Commissioned Officer (Reservist) with the Singapore Armed Forces. I'm the Battalion Second-in-command of an Armored Regiment. I currently hold the rank of Major.

I love spending time researching high-quality growth companies. That also includes investing time analyzing their price action. In addition, it has allowed me to develop a clear understanding of how institutional investors play their game.

Our best research ideas in the service are highly actionable. We own our best ideas and have skin in the game. Our ideas are not just designed to be a good read. Therefore you wouldn't get abstract theories or concepts from us. You will only get timely and actionable ideas. These are also high probability and workable set-ups with lower-risk entry points. 

My LinkedIn: https://www.linkedin.com/in/jjere/







Follow

Disclosure: I/we have a beneficial long position in the shares of ARKK, TSLA, ROKU, SQ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.