Whether or not you are a fan of growth stocks, chances are you are aware of Catherine “Cathie” Wood. The founder and CEO of exchange-traded fund manager ARK Invest, Wood has seen a stunning rise from bit player to Wall Street star, thanks to the strong performance of her flagship ETFs, ARK Innovation ETF (NYSEARCA:ARKK) and ARK Next Generation Internet ETF (NYSEARCA:ARKW).
In 2020, ARKK posted returns of 152.5%. ARKW delivered an even higher rate of return in 2020, climbing in value by 157.07%. Admittedly though, performance has cooled considerably in 2021. With many of her top holdings still down from their respective February highs, ARKK has only returned 5.05% year-to-date. Since the start of 2021, ARKW has posted similar sub-par returns (5.27%).
Wood has also gotten a lot of notoriety for her extremely bullish predictions for the future price of Tesla (NASDAQ:TSLA) stock. Her price target may have been laughed off by some in 2018. But in January 2021, shares in the EV maker hit her $4,000 ($800 post-split) target. Even as ARK has trimmed its Tesla holdings, the growth investing maven remains bullish. She now has a $3,000 price target on the stock, more than four times where it trades today.
That said, instead of following her lead into Tesla, you may find more opportunity diving into the names ARK Invest has been bullish on. Per the firm’s most recent 13F filings with the Securities and Exchange Commission (SEC), Woods and team hold big positions in the following seven growth stocks:
- DraftKings (NASDAQ:DKNG)
- UiPath (NYSE:PATH)
- Palantir Technologies (NYSE:PLTR)
- Shopify (NYSE:SHOP)
- Skillz (NYSE:SKLZ)
- Teladoc (NYSE:TDOC)
- Unity Software (NYSE:U)
Growth Stocks: DraftKings (DKNG)
Ahead of the fall football season, many investors dived into DraftKings stock. But ARK Invest was diving back even earlier. Across its ETFs, the firm increased its holdings in the online sportsbook operator by 211% in the June quarter.
This accumulation has continued, as seen from ARK’s purchase of another $60 million worth of DKNG stock across late August. So, should you follow Woods’ lead, and add it to your personal portfolio?
Yes and no. On one hand, the “future of gambling” play’s continued high levels of revenue growth may enable it to maintain, or even grow, its current premium valuation. On the other hand, if underlying issues become more of a concern in the eyes of investors? Shares may be at risk of seeing downward pressure.
That is, it could experience some multiple compression if markets start to sour on growth stocks. It could also experience a pullback, if concerns about heavy competition from rivals like Caesars Entertainment (NASDAQ:CZR), MGM Resorts International (NYSE:MGM) and Penn National Gaming (NASDAQ:PENN) increase. On top of either risk factor, investors could also grow impatient about its long road to reaching profitability. Trading for around $60 per share today, waiting until it dips again to buy may be the best move.
Starting in April, Wood’s funds began to build up a position in UiPath, an automation software play, which went public that same month. It’s now a top 10 holding in ARK Autonomous Technology & Robotics ETF (BATS:ARKQ), making up around 5.15% of its overall portfolio.
PATH stock started off strong in the month following its debut, soaring from its $56 per share initial public offering price, to as much as $90 per share. But since June, it’s fallen back to where it started. The reason? Concerns about its valuation have outweighed the fact it’s been delivering results in line with expectations.
Even after its slide from $90 back to around $56 per share, UiPath sells at an extremely high valuation, with its forward price-to-earnings, or forward P/E, ratio of around 3,502. It also sells for around 32.8x its estimated sales for the fiscal year ending January 2022.
As a Seeking Alpha commentator recently broke down the situation, it’s debatable whether shares will deliver strong returns in the coming years, or if its likely rate of return in the years ahead isn’t worth the risk. Assuming, of course, it continues to grow its sales/earnings in-line with projections.
Only time will tell whether Wood is on the money here, or if the valuation skeptics will prevail. With this in mind, those bullish on it as a play on the rise of automation may want to wait for more pessimism to sink it lower before buying.
Growth Stocks: Palantir Technologies (PLTR)
Well-known as a favorite of the Reddit stock trading community, big data powerhouse Palantir Technologies is a Cathie Woods favorite as well. Her firm increased its holdings by nearly 64.7% between April and June. Overall, ARK Invest has around 2.2% of its assets under management invested in PLTR stock.
So far, it’s been a roller coaster ride for this popular “meme stock.” After zooming from $10 to $25 per share at the end of 2020, thanks to bullishness due to its ties to the incoming Biden administration, Palantir shares saw a tremendous pop in February, when it climbed to prices as high as $45 per share.
Since then? It dipped during the spring, when investors rotated out of growth stocks, and into Covid-19 recovery plays. The second “meme stock” wave gave it a boost in May/June, but in July it dipped back toward the low $20s per share. Strong results for the June quarter helped it make its way back above $25 per share.
Its most recent results also showed that the company’s growth in the commercial sector is picking up. This bodes well for the company, as it suggests it’ll continue to increase its sales by 30%+ in the coming years.
As I put it late last month, PLTR stock will likely stay strong until markets get volatile. In other words, until factors like the Federal Reserve’s rolling back of its “easy money” policies puts big pressure on “story stocks” like this one. Unless you believe fears of tapering and eventual interest rate increase are overblown, it may be best to tread carefully here.
Pandemic tailwinds helped to send e-commerce SaaS provider Shopify from under $350, to around $1,200 per share, in 2020. So far in 2021? The stock has delivered less jaw-dropping, but nonetheless solid returns (it’s up 28.2% year-to-date, to around $1,450 per share).
As of late, ARK has been trimming its position in SHOP stock, selling about $20 million worth of it earlier this month. Yet it remains a top holding of ARKK, as well as of ARKW.
In the past, Cathie Wood has talked about the company being set to become as big as Amazon (NASDAQ:AMZN); specifically, thanks to the growth of social e-commerce sales. In other words, online purchases that are driven by promotion on social media platforms like Facebook’s (NASDAQ:FB) Instagram, and ByteDance’s TikTok. The social e-commerce trend may enable Shopify’s platform (which basically provides e-commerce back end services) to continue scaling up.
Woods may be correct with both her theses, and her decision to pare ARK’s position in the stock. In the long run, the company (with a $184.4 billion market capitalization today), could continue to scale up, eventually climbing to the size of Amazon (which currently has a $1.75 trillion market capitalization). But for now, as investors get concerned about its high valuation (forward P/E of 220x), it may not exactly set the world on fire performance-wise in the short-term.
Growth Stocks: Skillz (SKLZ)
Skillz is a smaller growth stock compared to many of the other well-known Cathie Wood picks. But over the past few months, ARK Invest has backed up the truck when it comes to buying it. In the June quarter, the firm increased its stake in the mobile gaming platform by 309.2%.
The former special purpose acquisition company (SPAC) skyrocketed in value after its December 2020 deSPACing. Like similar names in this category, starting in February SKLZ stock experienced a continued move lower. ARK largely built up its stake in the spring, when after the “SPAC wipeout,” shares fell to around $15 per share, down from its all-time high of $46.30 per share.
However, “buying the dip” in this case has been more of a “catching a falling knife” situation. Shares have continued to move lower. Why? Investors have grown skeptical of its rich valuation. They’ve also likely soured on the prospects of its unique real money competition-based platform growing into a high-margin business generating billions in annual sales.
My take? Like Wood, I am bullish on this growth story. At the same time though, given its true payoff moment is years away, you may soon be able to buy it at a better entry point between now, and when it takes off once again.
Tesla may be ARK’s largest, and most high-profile holding. But Teladoc stock isn’t far behind. It’s a top holding of both ARKK and ARKW. Not only that, across its funds, Cathie Wood’s firm holds around 10% of the telemedicine play’s outstanding shares.
Given its obvious Covid-19 related tailwinds, TDOC stock skyrocketed in value in 2020. Yet it’s been a different story this year. Since January, the stock has taken a more than 33% dive. Mainly, as InvestorPlace’s Ian Bezek discussed last month, the company’s past tailwinds have been replaced with many headwinds.
After the lifting of lockdowns in the U.S., there’s not as much demand now than there was last year for virtual medical appointments. The space is also getting more crowded. Rising competition could make post-Covid revenue growth even more of a challenge. It’s also murky whether the company will be able to get itself out of the red.
Reassessing the situation, investors have decided shares are overpriced. However, if the company can in the upcoming quarter prove its skeptics wrong, by both staying ahead of rivals, and getting its costs under control?
Cathie Wood’s high conviction for TDOC stock could be vindicated. Buying this out-of-favor favorite of hers (at around $134 per share today) could be a shrewd move, if it manages to make a comeback.
Growth Stocks: Unity Software (U)
Unity Software was another growth name that Cathie Wood bought on the pullback during the spring, increasing ARK’s position by 45.9%. Shares in the company, which provides videogame development software, as well as operates a mobile ad platform, fell from as much as $164.40 per share in late January, to as low as $78.97 per share in May.
Since hitting its recent lows in May, U stock has made a partial recovery. It changes hands now for around $133 per share. Strong results and analyst upgrades are what’s been behind this bounce back. News that Apple’s (NASDAQ:AAPL) ad-tracking changes won’t affect the company’s mobile ad business as much as once thought has also helped to drive this bounce back.
The question now is, can it continue? Like many of Cathie Wood’s top holdings, it’s a story of whether high growth will outweigh valuation concerns. Projected sales growth of 37.3% this year, and 26.3% in 2022, may not be enough to justify its current super-premium forward price-to-sales (P/S) multiple (35.1x).
If there winds up being a rotation back into growth stocks, as Wood herself is predicting? Unity Software may be able to make a trip back toward its all-time high of $174.94 per share. If this fails to happen, and instead looming concerns that Fed tightening will lead to multiple compression? A move back below $100 per share may be in the cards.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.