The doom of ArK Innovation?
Innovation can reshape industries and change competitive dynamics, creating opportunities for innovative companies and risks for established players that are slow to adapt. New innovative companies are staying private longer now than in the past, but there are still publicly traded stocks that benefit from innovation. These include firms built around disruptive products and technologies, like Tesla (TSLA), and those that reinvent themselves, like Nvidia (NVDA), which leveraged its leadership position in the graphics processing unit market to build chips to power self-driving cars.
While significant mispricing is less likely in the public markets than the private, innovative companies are difficult to value because they often have little or no profits and there is considerable uncertainty about their growth trajectories. So, the market tends to discount its potential to compensate for the risk. This can create opportunities for astute investors, like Catherine Wood, who runs ARK Innovation ETF (ARKK). This transparent, actively managed fund targets stocks that will likely benefit from disruptive innovation and that are priced to offer attractive returns over the long term. This is a risky concentrated portfolio, but it will likely reward investors in the long run. Or not?
Just 2 years back, with COVID-19 looming around, the buzz on the street was about this exceptional fund focussed on investing in companies of the future: The Ark Innovation ETF.
If the markets bounced back quickly, and growth stocks literally ran up with wheels, the fund generated a staggering 152% return in 2020 alone!
Now bear in mind that this is when most markets around generated an astounding 30-40% return in the same period. Everyone hopped on the ride thinking that new age (over-valued) stocks would go to the moon.
This is what happens every bull run though, doesn't it? People happen to forget fundamentals during every bull run, and panic severely during drawdowns. The key however is to buy quality companies with strong fundamentals with some margin of safety and ride the rollercoaster by ensuring time is on your side.
Anyway coming back to ARK, fast forward to 2022 and Ark Innovation ETF is now down 63% from its high in February 2021. All of its relative outperformance has been erased and it now trails the Nasdaq 100 by 30% since its inception in 2014.
Unfortunate for both investors and speculators. Think it'll bounce back and generate returns for its investors or is it done now?
Let us know by replying to us! (yes we do read all replies:)
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