Recently there was an escalation in the battle between Main Street and Wall Street. It manifested itself when WallStreetBets made news with their actions in GameStop (NYSE:GME) stock to name one. The skirmish extended to other tickers like AMC Entertainment (NYSE:AMC) and Nokia (NYSE:NOK) and the antagonism continues. ARK Invest has created a movement that has incredible momentum changing the face of money management with radical approaches. They also manage a series of ETFs to mimic their methods. ARK Innovation ETF (NYSEARCA:ARKK) stock is one seven that they offer for different venues. It focuses on innovation and it’s worth a look today.
ARKK is up almost 160% in a year which is five times more than the S&P 500. The Nasdaq and the Russell 2000 small caps are also lagging miles behind. Clearly the default decision today is to be long ARKK stock but to what degree? It is an aggressive investment instrument, hence the big rewards. Given that nature, it should not encompass a large portion of mainstream portfolios.
This is not a knock against its quality because we don’t argue with results. The matter of suitability is the tricky.
On the ARK invest website, the biggest message is that they “invest solely” in disruption. This is a bold statement because placing all your eggs in one basket is not the traditional method. Furthermore, doing it with speculative stocks takes the radical approach to another level.
ARKK Stock Has a Narrow Focus
So far it has worked extremely well but ARKK hasn’t endured a sustained bearish market. “Disruptive speculation” as they call it infers that they look for new things to uproot old ones. Usually that comes with almost no current fundamentals and the bet is entirely on future successes. The rewards are big but extremely speculative. This is solid aggressive strategy, but not for an entire portfolio.
Nevertheless, ARK is doing it and the scoreboard proves it. ARKK stock rallied almost 400% from the pandemic low to the February highs. Last week, the stock market had two red days as part of normal price action. The S&P 500 fell 3%, ARKK on the other hand lost 17% from high to low. This could be a preview of the pain that could come if equities really correct.
Once again, my point here is not to knock the strategy. Making bold bets has paid handsomely for ARK and its fans. Their highest profile public bet was on Tesla (NASDAQ:TSLA) and they deserve huge accolades for that. They taught skeptics like me a lesson in humility.
This doesn’t change the fact that investors who allocate money to ARK’s ETFs should know the risks. I worry about those who blindly follow the strategy especially the “entirely” bit. This is especially dangerous for those who are above 40 years old. Young people have time to recover from mistakes, but the older we get, the less that becomes feasible.
Ark investment started in 2014, which means that they haven’t survived a seriously bearish stint yet. Yes, we have had dips but overall the rebounds have been in V-shape recoveries. Luckily, ARK’s methodology is that they are almost an open book. They report on their activities on the daily basis. This makes it easier for investors to poke and prod before acting.
Hire Their Team to Work for You
If I like what they’re buying so much, I should just hire them. Simply buying their ARKK ETF would be a blanket investment in their efforts. This is an aggressive ticker but not completely full of wild cards.
The top 10 holdings represent almost half of it and includes excellent companies. The biggest one is Tesla with almost 10% weighting. Roku (NASDAQ:ROKU), Teladoc (NYSE:TDOC) and Square (NYSE:SQ) are the next three. Baidu (NASDAQ:BIDU), Zillow (NASDAQ:ZG) and Spotify (NYSE:SPOT) round out the top 10. These are household names already and they are incredibly successful companies. Since this is a growth strategy, valuations of each of these companies doesn’t matter that much. They are big spenders because they deliver big growth results.
For example, Square is the most exciting payment processing company and it’s setting trends. Old dogs like Visa (NYSE:V) and MasterCard (NYSE:MA) are merely trying to keep up with the new kid on the block. Baidu is making headway in the self-driving arena. Teladoc is blazing trails in personal health, which is now extremely important since the pandemic happened.
The bottom line is that ARK Invest is doing great things, that’s why they have the limelight. Trading along with them makes a ton of sense but with finite risk. The amount of exposure depends on personal preference and situations. People have different horizons and intestinal fortitude.
Trust in the Method But Be Cautious
ARKK stock is not an easy leap of faith but, for now, it is working. The charts suggest that the buyers are in control. Last week, it bounced off $126 per share. Monday, it recovered some with a 5% rebound. The bulls’ job now becomes to not lose last week’s lows. Otherwise, they could trigger a bearish technical pattern to target $110 or lower. This is not my forecast, but it is a scenario that could unfold.
Remember that great stocks sometimes fall due to no fault of their own. If the selling persists on Wall Street, it will drag the good and bad with it. ARKK stock will need to help on the entire market to remain bullish. So far the Federal reserve is fully committed to reflating this economy. The White House is supporting it with trillions of dollars of stimulus. There is inflation creeping in but so far the metrics cannot register it. If and when that happens the Fed prop could be in danger.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
