Why is Cathie Wood so divisive? … what it reveals about investing biases and temperament … looking at today’s tech sector objectively

Some investors loathe Cathie Wood.

At the same time, many other investors adore her in an almost cultish manner.

It’s an odd level of polarization to be associated with an investment professional.

For readers less familiar, Wood is the CEO and CIO of Ark Invest.

She’s best known for being the engineer of ARKK, which is her disruptive technology ETF. It holds a basket of top-tier technology stocks including Tesla, Zoom, Roku, Crispr Therapeutics, and Teladoc.

More on that in a moment…

So, why is Wood so polarizing?

Well, it seems to be less about Wood herself. As I understand it, she’s an intelligent, kind, generous person.

It’s more so about her market approach, coupled with a brazen bullishness that rubs some people the wrong way.

But why would her market approach and confidence be polarizing?

Well, in Wood’s own words, she focuses on “disruptive innovation” companies. As it turns out, many of them are relatively young and/or small compared to older, more established companies operating in their respective industries. This makes sense – to be a disruptor, logic suggests you’re doing things differently, which means starting from scratch.

Now, this alone could breed some skepticism, since there’s often a kneejerk dislike and/or wariness of what’s new and different. But it goes far beyond that…

A smaller, newer disruptive company often operates without profits. Again, this is logical. These companies haven’t been around for decades, they haven’t amassed huge market shares, their tech-based research-and-development expenses can easily swamp their revenues, resulting in quarter-after-quarter of losses…

Okay, but so what? What’s wrong with investing in this type of company?

Well, nothing – unless you’re an investor who believes in healthy profits and reasonable valuations above all else, and you watched Cathie Wood’s profitless, exorbitantly-valued stocks blow the doors off your portfolio from 2017 through 2020.

***The jealousy and schadenfreude of Cathie Wood

Investing is often very emotional.

That’s understandable. Our money is on the line. By extension, our financial security is on the line – as are specific dreams of, say, that new, nicer home…or the trip to Europe…or paying for our children’s tuition.

Money gets us emotional.

Meanwhile, though we all know that life isn’t fair, nearly all of us feel a sense of indignity when we see things happening that we don’t perceive as fair.

Enter Cathie Wood and her “unfair” investment returns…

As you can see below, from January 1, 2017, through February 12, 2021, Wood’s flagship ETF utterly destroyed the S&P 500. ARKK climbed 733% in those four years, which was nearly 10X the S&P’s 76% return.

The “unfair” part of this, as some investors see it, is that roughly half of Wood’s stocks didn’t have a single dime of profit to their names during this epic bull run.

As of March 2021, 85 of the 165 stocks included in ARK’s actively managed ETFs generated net losses in their latest fiscal years.

Grumpy fundamentals-based investors eyed this with overwhelming disapproval.

“Why is this basket of profitless stocks soaring hundreds of percent while regular value stocks with real profits are barely moving higher?”

Given the emotional reaction to investing, it was a gripe that bordered on personal offense.

From this perspective, Wood’s portfolio gains were unearned, unmoored from reality, foolish, signs of a bubble, and bound to pop.

***And pop they did

From that February 2021 highwater mark, ARKK fell as much as 77% as of mid-June.

As you can see below, this fall wiped out all the gains, and more, beginning in 2020. It’s what we call a “round trip” return. But also note that ARKK’s drop has nearly fallen to its pandemic-low.

The black trendline shows us ARKK’s 2020 starting level, and the blue trendline shows us its pandemic low. You can see that ARKK currently trades in the middle.

In the wake of this collapse, many investors gloated with a big helping of “I told you so!” while calling for even more losses.

For example, here’s an excerpt from a Forbes article in March titled “No Ark Can Save These Cash-Burning ‘Innovators’”:

With her flagship ETF, ARK Innovation Fund (ARKK) down 57% from its 52-week high, Cathie Wood, founder of ARK Invest, is franticly attempting to convince investors that her “disruptive innovation” strategy will work again.

I disagree.

ARKK’s portfolio is filled with cash-burning companies that continue to trade at nosebleed valuations. These companies, along with the ARK Innovation Fund, are in the Danger Zone.

***So, what’s the point of this Digest?

Two points.

First, as investors, we can “be right,” or we can “make money” (hopefully, we can do both).

For example, let’s say you were one of the investors eyeing ARKK’s 2020 climb with disapproval, believing it was unearned.

But let’s say I could give you a choice:

Option 1 – go back to the pandemic low and say “Hey everyone, this monster run that ARKK is about to enjoy will be a round-trip bust – trust me, I’m right.”

So, you wouldn’t participate in the surge, and you’d be “right” from an orthodox value investing standpoint.

Or…

Option 2 – buy into the “wrong” decision of aligning your wealth with ARKK and make, let’s call it, 300% in the post-pandemic rally.

So, you’d do something foolish, according to traditional value-investing hardliners, but you’d make a boatload of money.

That’s an important question to ask, because it dovetails into our second point…

After months of destruction, ARKK appears to be carving out a base.

But the potential bullishness goes beyond that. Here’s our hypergrowth expert Luke Lango with more:

[ARKK] is surging of late. It’s is up about 17% over the past month. Compare that to the S&P 500’s paltry 1.5%.

But that’s first-level thinking.

Digging deeper, our second-level thinking concludes that Cathie Wood’s stocks are forming a rare technical pattern — a “bullish ascending triangle.”

Here’s the kicker: Bullish ascending triangles typically precede massive breakouts.

Cathie Wood stocks aside, across the tech sector we’re seeing breadth indicators flashing super bullish signals right now.

Put it all together, and the picture comes into focus. 

High-flying growth stocks appear be on the cusp of a massive breakout.

***Our challenge as investors is to see things as they are… Rather than try to squeeze what’s happening into our individual, preconceived narratives of what should be happening

Yes, the economy is slowing… rates are rising… disposable income is dropping… stocks have been falling… the economy is likely headed into a recession…

In the wake of all this, it almost doesn’t seem right (or fair) that tech stocks could be on the verge of a new, sustained climb higher.

But our challenge as investors is to see things for how they really are, rather than how we believe they should be. In other words, we should pursue a focus on facts, not feelings.

On that note, beyond the bullish ascending triangle pattern that Luke identified, is there another bullish “fact” related to tech stocks that we need to observe without bias?

Back to Luke:

[Last week,] the number of Nasdaq 100 stocks trading above their 200-day moving average just crossed from below 20% to above 20%. That’s a bullish breadth crossover signal which always leads to big rallies.

When I say always, I mean always.

Since 2008, this bullish breadth crossover signal has led to positive tech-stock returns over the following 60 days 100% of the time.

The average return in that stretch? 15%.

Source: Bloomberg

To put it another way, one of history’s most reliable bullish breadth indicators likely triggered tech stocks toward the cusp of a massive short-term breakout.

If you read Luke regularly, you know he’s not just bullish on the next few months.

In fact, though Luke believes there’s the potential for a final leg down in tech stocks before we reach the ultimate low, he believes that low will be short-lived – with monster gains on the other side of it.

From Luke’s Early Stage Investor Daily Notes last week:

If [one final leg down in tech stocks] happens, our stocks will be much higher in July 2023 than in July 2022.

If it doesn’t happen, our stocks will be much higher in July 2023 than in July 2022.

Regardless, our stocks will be higher in 12 months.

And further, our stocks will higher in July 2025 (three years) and July 2027 (five years).

***Wrapping up, regardless of how you feel about Cathie Wood, you should at least evaluate her stocks and the broader tech sector today

I’m not necessarily saying “Buy in!” That decision might not fit your portfolio style and/or risk temperament.

But I’m saying that based on objective analysis, as well as technical analysis, something is happening in tech – and it appears bullish.

You can ignore it based on your preexisting narrative or preferred market approach. Or you can be open to the possibility that gains are coming, whether we believe those gains are logical or not.

We’ll end with Luke’s bullish take:

…Stocks have been crushed in 2022.

You know it, I know it, our portfolios know it.

Investors are consequently running from the markets to hide from the collateral damage.

But don’t despair! I’ve just laid out a mountain of (growing) evidence suggesting that, not only is the worst of the selloff over, a massive market rebound in the horizon.

Here’s the thing: That rebound will only be concentrated in high-growth stocks.

Have a good evening,

Jeff Remsburg