Each bull or bear market sees the emergence of an investor incarnating the new narrative. Previously, we covered Michael Burry, whose career is now defined by his “Big Short” in 2008. The 2010s bull market might as well be remembered as Cathie Wood’s bull market.
Wood was in the spotlight and one of the major promoters of the major stock stories of the period. She benefitted handsomely from her absolute faith in the growth technology stocks that came to dominate the market since the 2008 crisis.
Because Ms. Wood is such a famous figure, she is also profoundly polarizing. Some investors consider her a visionary. Other investors see her as a scam artist doomed to fall when the bubble popped.
A history of drastic outperformance AND underperformance, depending on the period, contributes to both narratives.
Who Is Cathie Wood?
Catherine Duddy Wood was born in 1955 and started to work in finance in the late 1970s. She worked in multiple financial firms over time and is now best-known for the ARK ETFs she founded in 2014.
Her first brush with explosive growth was during the dot-com bubble. At its peak, Wood managed $800M in assets at Tulepo Capital Service. She left the company in 2001. After Wood left, by the end of the year, the firm was managing only $200M (likely from both crashing stock prices and redemptions).
Wood has specialized in investing in innovation and disruptive technology. She is a fervent believer in progress and the potential of technology to deliver exponential growth. She is also a strong proponent of democratizing finance, especially for women.
Cathie Wood’s Investing Strategy
Since 2014, ARKK, the flagship of the ARK ETFs, has performed well, but with very high volatility. It rose very quickly in the pandemic period, peaking at $152/share. It has now lost all its pandemic gain and is back to $46.
ARKK was notably heavily invested in some of the fastest moving and controversial investments, like Tesla and Bitcoin. Overall, Wood’s strategy is very pro-cyclical. She invests in companies with massive growth potential and sets very ambitious price targets. For example, she predicted that Tesla would reach a value of $3T and predicted a $1M price for Bitcoin.
This means that when markets are optimistic and booming, Wood’s holdings are likely to outperform. But when fear of recession or rising rate dampens investors’ enthusiasm, they are likely to go down.
Considering its fall from the 2021 highs, it seems Wood’s ARKK ETF is on the way to replicating the pattern of Tulepo in 2001. Nevertheless, some of ARKK’s holdings might still grow and turn into highly profitable businesses in the long run.
Wood’s Opinions on Current Markets
Wood accurately warned that the US economy was already in a recession at the end of June. She is also expecting oil prices to crash, despite admitting to having made a wrong call with the same prediction at the end of 2021. Similarly, she still expects deflation to be a much bigger problem than inflation in the long run.
Overall, she believes that radical innovation in mobility, energy, IT, and biotech will radically change the world and usher in a new era of secular growth.
Despite a rocky first half of 2022, Wood seems more confident than ever about her ability to deliver outstanding financial returns.
A year earlier, she’d thought her firm, ARK Invest, would deliver annualized returns of 15 percent, she acknowledged, setting up what seemed like a mea culpa for her poor performance. Instead, she doubled down: “Now we think 50 percent.”Source: NYmag.com
Cathie Wood’s Stock Picks
Cathie Wood’s top holdings are focused on disruptive tech, notably electric vehicles (EVs), biotech, and remote telecommunication/streaming.
Her top 5 holdings are Tesla, Zoom, Roku, Teladoc Health, and CRISPR Therapeutic.
As a rule of thumb, most of Wood’s picks have the following characteristic:
- Focused on innovation, often creating entirely new markets (EVs, gene editing, etc…).
- Investing massively in growth, depressing current profits as all cash generated is reinvested.
- Very pricey by metrics like free cash flow or P/E.
- Explosive growth, often growing revenue at 20%-50% yearly.
- Regular stock offering or capital raising to fund hypergrowth, leading to some dilution.
- High volatility, with good chances of individual stocks going up and down x3-x10 in a year.
Regarding sectors or investment ideas, Wood’s favorite themes are:
- Work from home is here to stay and will change the way we work permanently.
- Healthcare and biotech will be revolutionized by innovation genomics.
- FinTech is posed to disrupt traditional banking.
- DeFi (Decentralized Finance, including Bitcoin and Ethereum) reduces wealth confiscation risks and will play a big role in the future of finance.
- 3D printing, space tech, AI, and robotics will power charge future GDP growth.
Cathie Wood’s investment philosophy takes growth investing to an extreme level. She’s openly and unashamedly abandoning value investing principles and seeking out companies not for what they are, but for what they could be.
This can be a very profitable strategy, as ARKK proved in 2020, but it can also be a very risky strategy, as ARKK proved in 2021 and 2022.
A full commitment to an ARKK-style strategy would probably be beyond the risk tolerance of the average investor, but the principles certainly have a place in an expansionary period.