CATHIE WOOD’S FORECASTS – DOES HER ARK HAVE A LEAK?

INTRODUCTION

In a post [Link] a few weeks ago, we compared growth and value investing using the ARK family of funds (Growth) and Tobacco Stocks (Value). The ARK funds invested in technologies with promising futures. Investors have long looked at our old friends, the tobacco companies, with suspicion, fearing they would go out of business.

The tech funds had a great run for a few years, while the tobacco stocks continued to drift downward, despite hefty dividends and share buybacks.

CATHIE WOOD’S STORY

The ARK Exchange Traded Funds have been wildly popular and very much in the news since 2019. Cathie Wood, a respected analyst, started these funds in 2014, investing in companies with disruptive technologies.  The companies were early stage, but she believed they would grow rapidly. We looked back to see how she described their prospects as prices fluctuated. The stories she tells supplement (encourage?) the stories we tell ourselves. But is her story realistic? As a devoted “number cruncher” I have tried to make sense of her forecasts.

In 2020, her story became popular. Part of its appeal was minimal interest rates that pushed investors toward risks that would not pay off for years. The money could earn almost nothing if it were not invested in a growth product. Technology/growth funds responded with higher prices.

Then the investors’ story began to shift. In April 2020, Cathie said that her flagship ARK fund (ARKK) would grow from $42 to $84 over the next 5 years. Investors began to buy aggressively, and as the stock climbed, huge amounts of money flowed into the shares. Jason Zweig, the Wall Street Journal writer, cautioned that ARK could be sowing the seeds of its own destruction.  Its increasing size would limit ability to buy smaller companies and the fund could also face liquidity problems if it needed to sell some of its holdings.

By early 2021 the stock was $156, So, the stock had grown 3.7 X in less than one year. Ms. Wood’s prediction of 15% a year looked like a giant understatement. Adoring shareholders began calling her ‘Mamma Cathie.’ Koreans called her Money Tree.

As Zweig warned, “big money” bought in, creating a top. From that peak, the stock dropped to $99 in December 2021.  Cathie Wood defended her story and said the fund would go up 40% a year for the next five years, to $530. By April 2022, the price was down to $59. Now Cathie was no longer driving the narrative; shareholders were telling their own story.  Nothing changes a fund story’s fairytale ending like a rapidly declining price.

In April 2022, Wood ‘doubled down” and said the stock would go up 50% a year for the next five years, to $448. Now, almost a year later, the stock is $39 a share. Cathie Wood may yet be right about the value of her disruptive investments. But each time the stock declines, she has issued a more optimistic forecast.  It is true that her forecast starts from a lower base price, but prices must eventually reflect earnings.  Can her companies be so successful that their earnings will increase 7x in just five years? Now, only 3 of the top 10 holdings are profitable. And Wood’s price projection for her fund implies that the earnings growth will be nothing less than spectacular. With each downdraft in the fund price, Ms. Wood’s story looks more fanciful than analytical.

The glitter of the ARK growth story has become a bit tarnished in the last few months, but there are still believers. So far in 2023, ARKK has rallied 23%. ARKK has rallied 23%. And the 6 ARK funds as a group have also averaged a 23% increase.  But this is a far cry from the price three years ago; ARKK is selling for 75% less. Using Wood’s forecast from three years ago, the fund price should be $64. Her forecast from one year ago would suggest a price of $82.

In a few weeks, we will look at the other end of the investment spectrum – tobacco stocks.