In a year when the S&P500 is boasting almost 25% gains year-to-date, the ARK Innovation ETF (ARKK) is down -23% on the year and -40% from its high of $159.70 set on February 12, 2021. Check out the chart below. ARRK's downward trajectory is in neon blue. The strong performance of the S&P500 is in orange.
Many meme stocks have fallen hard from their soaring prices at the beginning of the year (following the Stimmy checks). Gamestop traded at $158 on Dec. 17, 2021, after summiting at $483/share on Jan. 27, 2021. AMC rests at $32 after soaring to $72.62 on June 2, 2021. Blackberry traded at $9, after spiking at $29 on Jan. 27, 2021. Tilray got high on $67/share on Feb. 10, 2021, and now sells for under $8/share.
What is happening? Which of these funds/stocks are a value now, if any? What lessons can be gleaned from the rollercoaster ride?
We’re going to look at the culprits that keep coming up over and again, namely: price, sales, P&L (profits and losses) and popularity (marketing/pump & dump).
Ark Innovation ETF (symbol ARKK)
What’s going on with ARKK? Price matters.
All of the top holdings of this fund, with the exception of Teladoc, are still trading at astronomical multiples, even after the drop of 40% in the fund. Yes, the top holdings are all innovating. Sales growth is impressive. But the prices are just too high.
One of the top holdings in the ETF is Tesla. Tesla’s sales growth was 57% year over year. That looks amazing compared to General Motors and Ford. Those companies saw declines in sales growth of -24% and -5%, respectively. However, the Chinese electric vehicle makers are doubling and tripling sales year over year. Many Chinese EVs are going to sell into the European market and compete with Tesla there, in addition to China. So, should a company like Tesla that earned less than a billion dollars last year be worth almost a trillion? Tesla’s price earnings ratio is 300. An average price earnings ratio is about 17.
Most of the top holdings of the ARK Innovation Fund have less than a billion in earnings, or are losing money. Yet, almost all enjoy market values of close to $50 billion, or in the case of Tesla, $913 billion.
Many people were very tempted to buy into ARK funds at their zenith. Ark ETFs benefited from a lot of media coverage when the company’s funds soared. Catherine Woods and her crew now face stinging criticism and pressure from the broadcasts and blogs about how poorly the funds have done in 2021 – losing money, while the S&P500 raked in the dough.
Professional investors sell high – particularly when things get frothy. (Large investors are given priority treatment in trade order. Many use algorithms and high-frequency trading, in addition to professional analysts and researchers, to assist them.) Traders who follow headlines and charts are easy prey to the professionals because headlines most often put you on the wrong side of the trade – buying high and selling low – and charts rarely predict a reversal of fortune when the trendline keeps busting through the ceiling.
Another concern is that Ark Funds is a relatively new fund company – founded in 2014. In a high-leveraged world, it’s safer to stick with fund companies that have been around a lot longer, have a high credit rating and are well-capitalized. You can access funds with targeted innovation and other desirable industries and specialties in through fund companies that have been around a lot longer than ARK. As just one example, iShares U.S. Technology Breakthrough ETF is up 18% on the year, even with the current sell-off in technology. (iShares is owned by Blackrock – an AA- rated company.)
As I mentioned above, Teladoc is oversold. Investors were willing to pay $308 a share for Teladoc in February 2021. It’s now at about $95 a share. With growth expected to be about 43% in the fourth quarter and 2021 revenue doubling what 2020 was, it appears that Teladoc could be ripe for purchasing.
Crowdstrike, Cloudflare and Okta are all trading 30-40% lower than their 52-week highs. This is another case of price and profitability matters. All of these companies had net losses last year, with noteworthy sales growth ranging from 50-65%. However, the price-sales ratios are 50 for Crowdstrike and 100 for Cloudflare – even after the rout.
Elevated prices make professional investors skittish at the first sign of a data breach or resurgence in the pandemic. News of Omicron emerged in late November and cybersecurity firms have been on the selling block since.
These companies are in demand. Once their prices come back to reality, there could be some excellent buying opportunities.
Bitcoin is down -32%. It was trading at $46,829 a coin on December 19, 2021. On November 9, 2021, you could’ve sold your bitcoin for $69,000 a coin. The biggest issue in the crypto-world is the disconnect between investor hopes and reality. Crypto gurus convince their devotees to buy and hold, while whales trade. The average holding time for the most popular coins is under 90 days. (Bitcoin: 75 days, Ethereum: 69 days, Solana: 30 days, Cardano: 73 days, Dogecoin: 48 days.) You can’t have a currency that squirrels around with such nutty price fluctuations. Cryptocurrency is a trading platform where everyone is hoping to get rich and quit their day job.
The other issue with Bitcoin and Ethereum is that they are energy hogs. According to energy experts, mining these OG crypto coins takes up far more energy than running a data center, and data centers are a real problem for technology firms that are trying to reduce their CO2 emissions. Tesla very famously used this excuse to get out of accepting Bitcoin for their products back in May 2021. A lot of Millennials and Gen Z, who are the most interested in cryptocurrency, are also the people who are the most concerned about healing our planet. What happens when their conscience weighs more heavily in the balance than fear and greed? That leads me to be more interested in altcoins, such as Cardano.
Whatever coin we choose, in today’s Wild West World, we have to be an active trader, rather than a Buy & Hold investor. There may come a time when cryptocurrency is something that we use on a regular basis. However, for now it’s still the pot of gold at the end of the rainbow.
It’s also very important to be diversified. Don’t place all of your eggs in the cryptocurrency basket. A hot slice or two to increase your portfolio performance may be appropriate, if you’re willing to babysit these investments.
With regard to meme stocks, it appears that at least some were pump and dump schemes. Bed Bath and Beyond and Blackberry’s prices have a giant knife-drop bisecting their year. After shooting the moon, both of these stocks plunged by more than half within a week. Tilray’s trajectory looks similar. However, Tilray’s sales growth is up 53% year over year, whereas Bed, Bath and Beyond and Blackberry sales have sunk by 32% and 26%, respectively.
GameStop and AMC are still trading a lot higher than they were a year ago. However, they are also well off their 52-week highs. Both of these companies were problematic before the pandemic. AMC’s sales growth looks spectacular this year compared to last year, and was up 539% in the 3rd quarter. However, that is still quite dismal compared to 2019. AMC’s sales were $5.471 billion in 2019, $1.242 billion in 2020, and are on track for $2 billion in 2021. Even with $5.5 billion in sales in 2019, AMC lost -$149.1 million. 2020 saw net losses of -$4.6 billion, with as much as -$1.5 billion on track to be lost this year.
Gamestop has a similar issue. Sales are far below what they were in 2018 and 2019. The company has been cash negative since 2018. Gamers are not shopping at Gamestop today as they did in yesteryear.
Price matters. Knowing how to price stocks is a lot trickier than normal shopping on sale. Additionally, regular rebalancing will help you to be on the right side of the trade and prompt you to sell high rather than watch your gains plummet.
It’s also important to always keep a proper amount safe – an amount equal to your age. (Knowing what’s safe in a Debt World is going to be key.) Our stock portfolio is actually our “at risk” side. If we’re keeping enough safe and we are not losing money on the “low risk” side that is our biggest protection against losses. It also affords us the ability to buy low. (Most people don’t buy low because they can’t. They’ve lost too much money and don’t have any liquidity.)
When we are properly diversified in the “at risk” stocks and funds (equities) side, we have large, mid and small companies. We are not over concentrated in one sector or style, whether it is technology, value (out of favor right now) or dividends. Then, when stocks soar, our slice becomes too large, or sometimes even two or more slices, and it prompts us to sell high. When our slice gets too small, it’s prompting us to buy low (or replace the slice with something better). So, the Nest Egg Pie Chart System (that we teach at our Investor Educational Retreats) is itself helping you to become more professional. All you have to do is learn the ABCs of Money that we all should have received in high school.
If our strategy only works when stocks are high or are always going up, then we have a flawed strategy. Buy & Hold is a last century strategy that hasn’t worked very well in the 21st-century. It’s time to update the software with a 21st Century time-proven plan.
If you're interested in seeing the Stock Report Cards that informed this blog, email info@NataliePace.com with SRCs from 20211221 in the Subject Line.
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Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.