One of today’s most widely watched US ‘hot stocks’ is the ARK Innovation ETF (NYSE: ARKK). This exchange-traded fund has New York-listed shares that trade just like other stocks. Launched on 30 October 2014 and managed by Cathie Wood, the ARKK stock price has delivered blockbuster gains for shareholders, especially in 2020/21. But its runaway success has reversed recently, so is it time to back or bin Cathie Wood?
The ARKK stock price explodes and then implodes
ARK Investment Management specialises in buying companies that display ‘disruptive innovation’. By their very nature, these businesses are modern, highly tech-enabled firms seeking to dethrone incumbent players. The ARK Innovation ETF is the group’s flagship fund, with net assets of $23.1bn at end-April. Typically, ARKK holds 35 to 55 stocks, heavily concentrated in the communication, healthcare, technology, and consumer-cyclical sectors. This ‘future focus’ has sent the ARKK stock price shooting skywards.
From roughly five years ago (18 May 2016) to 19 February 2020, the ARKK stock price exploded from $18.31 to $60.37. That’s a near-230% surge, easily thrashing the S&P 500 index’s 64% gain. But as Covid-19 spread worldwide, the ETF’s shares plunged. On 18 March 2020, they had crashed to $34.69, collapsing by three-sevenths (42.5%) in a single month. That slashed the gain since May 2016 to below 90%. Ouch.
ARKK goes nuts in 2020/21
The recovery of the ARKK stock price since March 2020 has been a biblical comeback worthy of Lazarus. Today, the stock stands at $109.72, more than triple (+216%) its March 2020 low. $1,000 invested in ARKK at the low is now worth $316. Then again, the ARKK stock price went much higher earlier this year. On 12 February, it peaked at $156.58, but has since tumbled. Over the past three months, this hot stock has crashed by three-tenths (30%).
Remarkably, investors buying ARKK on 18 May 2016 and selling at the February 2021 top would have made a 736% return in under five years. After recent weakness in the ARKK stock price, that return has been cut back to 499%. This still massively exceeds the S&P 500’s 105% gain over the same period.
Three lessons for investors
First, like mythical Icarus, the highest-flying shares often fall fastest to earth. When financial gravity finally takes hold, yesterday’s stars frequently become today’s dogs. Likewise, when market bubbles burst, declines can be both sudden and dramatic. With inflation (rising prices) and interest rates seen going higher, the future ARKK stock price is unlikely to resemble its spectacular past.
Second, the crazy performance of the ARKK stock price has been built on the back of highly concentrated bets on key companies and sectors. While such intensive investing can produce spectacular returns, it can also be disastrous when stock prices and liquidity nosedive.
Third, almost all fund managers with meteoric performances eventually crash back to earth. It happen to Bill Miller at Legg Mason and to Neil Woodford in the UK. Even Warren Buffett’s Berkshire Hathaway has underperformed the S&P 500 in recent years. Hence, Cathie Wood might well become the latest in a long line of fund managers to be humbled by Mr Market’s fickleness.
Finally, would I invest in ARKK at the current share price? No, because I’m an old-school value investor, so this go-go growth fund’s stock isn’t for me.
