Ark Innovation Fund (ARKK) Forecast: Cautiously Optimistic
The Ark Innovation Fund (ARKK) stock price crashed to the lowest level since September 2020 as the rotation from growth to value intensified. The fund was trading at $85 on Friday, which was about 46% below its all-time high.
Rotation from growth to value
The ARKK fund is the flagship fund of Cathie Wood, one of the best-known women on Wall Street. It is an expensive fund that has an expense ratio of about 0.75%. In contrast, some of the best-known passively-managed funds have a ratio of less than five basis points.
The fund invests in some of the best-known growth stocks in the United States. Tesla, its largest holding, is one of the fastest-growing automakers. Similarly, Zoom Video is the best-known teleconferencing stock in the world. The fund also has stakes in companies like Roku, Teladoc, Shopify, and Spotify.
These stocks have fallen out of favor of Wall Street as a sector rotation from growth to value emerges. The rotation is also from lockdown to reopening stocks.
As you recall, tech companies were among the best-performing names during the pandemic and the lockdowns that ensued. For example, Zoom’s annual revenue jumped from $622 million in 2019 to over $2.6 billion in 2020. Its trailing twelve-month (TTM) revenue has been $3.6 billion. Similarly, Teladoc’s revenue jumped from $553 million in 2019 to above $1 billion in 2020.
Therefore, analysts expect that this growth will soon start to slow as the world recovers and things go back to normal. Besides, recent scientific numbers show that the Omicron variant is less severe than the other variants. Also, many governments have resisted imposing lockdowns.
The Fed also has a role to play in the recent trends of the Arkk Innovation Fund. In November, the Fed started tapering its $120 billion per month asset purchases by $15 billion. The idea was to keep slashing an additional $15 billion per month until June this year.
In December, the bank changed its view and decided to accelerate the pace of tapering to $30 billion. As a result, the bank hinted that it would end the quantitative easing (QE) plan in March this year.
The minutes published on Wednesday last week showed that more Fed officials were getting more concerned about inflation. As a result, many of them believe that the bank needs to raise interest rates at a quicker rate this year.
Historically, growth stocks like those in the ARKK fund tend to do well in a period of low-interest rates and then lag when tightening starts.
Still, there are three reasons to believe that the fund will do well in 2022. First, many stocks in the fund have become extremely cheap, meaning that many bargain hunters will start buying. For one, over 70% of all stocks in the fund have already dropped by more than 10% from their highs.
Second, the fund still has some quality companies that can do well over the years. For example, companies like Block, Roku, Tesla, and Coinbase have a healthy market share in their industries.
The third reason is based on technicals. On the daily chart, we see that oscillators like the MACD and the Relative Strength Index (RSI) have moved close to the undersold levels (see the illustration below). In most cases, this is usually a sign that the sell-off will continue for a while before a new bullish trend starts.
This rebound will likely happen when the Fed starts hiking rates because of what is known as selling the rumor and buying the fact.
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