In this article, we will examine the reasons why Cathie Wood is sticking to her innovation-centric strategy despite lower than expected performance in the first half of 2021. We will also review the 10 best stocks to buy for the next ten years based on Cathie Wood’s Q2 portfolio.
After generating triple-digit returns and witnessing a whopping inflow of $20 billion last year, Ark Investment Management founder Cathie Wood continues betting big on high-growth tech stocks. Wood, who is bullish on Bitcoin and Coinbase Global, Inc. (NASDAQ: COIN) and expects Spotify Technology S.A. (NYSE: SPOT) and Zoom Video Communications, Inc. (NASDAQ: ZM) to rebound sharply, is famous for finding and investing in hypergrowth names amid her thematic investing style. Last year, five out of six Ark Invest funds posted more than 100% return. The star stock picker, however, remained in the cold in the first half of this year due to rotation towards value stocks amid easing social distancing policies.
Despite that, the founder of the $55 billion New York-based hedge fund looks confident over her unique strategy of investing in disruptive technologies, with holdings concentrated in three sectors including technology, consumer goods, and healthcare. She strongly believes that innovation will replace industry incumbents, and gain the majority market share. She added significantly to her existing positions in internet stocks like Spotify Technology S.A. (NYSE: SPOT) and Zoom Video Communications, Inc. (NASDAQ: ZM) that gained significant traction during the pandemic year. The famous ETF managing firm initiated a huge $1.4 billion worth of position in the largest US cryptocurrency exchange Coinbase Global (NASDAQ: COIN) after it went public in April.
Meanwhile, short bets on ARK Innovation ETF hit a record high recently as several hedge fund managers are betting against the top-performing ETF of 2020. Shorting a fund means investors expect the value of the fund to fall in the days ahead.
Michael Burry’s hedge fund Scion Asset Management also held a bearish bet against Wood’s flagship ETF. On the other hand, Wood rebutted the Big Short’s bearish bets, saying Burry doesn’t have enough understanding of the innovation space. She believes inflation will drop in the months ahead, which will help in rewarding the disruptive innovation strategies again.
“When I see such negative sentiment out there, especially when it comes to valuation and longer time horizons, investment time horizons, I actually feel a little more comfortable. I like bad news,” Wood added. “The discounting is worse now than the news actually will be. I actually feel better in that environment for our strategies,” she said on CNBC’s “Tech Check.”
So far in 2021, the returns from Wood’s six funds averaged around 1% compared to the S&P 500 gains of 20% during that period. Although Wood’s $22 billion Ark Innovation fund plunged sharply early this year, the fund has been outperforming the broader market index in the last three months with gains of around 12% compared to S&P 500 index growth of 10%. The rebound in information technology stocks like Zoom Video Communications, Inc. (NASDAQ: ZM), Spotify Technology S.A. (NYSE: SPOT) and Coinbase Global (NASDAQ: COIN) helped the tech sector to beat value stocks in the past three months.
At the end of the second quarter, Cathie Wood’s Ark managed $53 billion in 13F securities. Square, Inc. (NYSE: SQ), Shopify (NYSE: SHOP), Twilio Inc. (NYSE: TWLO), and Teladoc Health, Inc. (NYSE: TDOC) are among the top picks of Cathie Wood.
Cathie Wood of ARK Investment Management
While Cathie Wood’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole, as its reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 111 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start digging into Cathie Wood’s top ten stock holdings to see how these stocks are likely to perform in the years ahead.
Best Stocks to Buy for the Next Ten Years Based on Cathie Wood’s Q2 Portfolio
10. Spotify Technology S.A. (NYSE: SPOT)
Number of Hedge Fund Holders: 48
Cathie Wood-led Ark Investment Management appears bullish over the fundamentals of audio streaming service provider Spotify Technology S.A. (NYSE: SPOT), which is ranked at the tenth spot in the list of 10 best stocks to buy for the next ten years. Wood considered the recent dip in Spotify Technology S.A. (NYSE: SPOT) stock price as a buying opportunity as her hedge fund lifted the position in the entertainment company by 23% to 2.46% of the overall portfolio.
Spotify Technology S.A. (NYSE: SPOT) recently announced to buyback of $1 billion worth of common stock.
In the second quarter investor letter, Worm Capital LLC, an investment management firm, discussed the stance of the firm on Spotify Technology S.A. (NYSE: SPOT). Here is what Worm Capital LLC stated:
“Spotify underperformed in the quarter, but we maintain our high conviction in the long-term thesis on each business model. Much like art or writing, investment research is a continuous process—it never really ends. Prices can move in either direction in any given quarter, but our advantage often comes from knowing the businesses so well that short-term fluctuations in pricing shouldn’t affect our decision-making. On high conviction positions, this patience is often rewarded, which is why research is so valuable to our process…
..Spotify has 350+ million users and 158 million paid users—and multiple catalysts for improved operating leverage over time. While the headline focus tends to revolve around margins and lack of current earnings, few on Wall Street seem to recognize the long-term potential: SPOT is focused on a land-grab of users while simultaneously innovating on the platform to create new margin-heavy lines of revenue (e.g. its podcasting advertising platform, live events, virtual events, direct monetization, etc.). Last May, when SPOT was trading under $200, we wrote that Spotify should be a $500 stock. We maintain that view.”
9. Exact Sciences Corporation (NASDAQ: EXAS)
Number of Hedge Fund Holders: 35
The biotechnology company Exact Sciences Corporation (NASDAQ: EXAS) is also a member of the 10 best stocks to buy for the next ten years based on Cathie Wood’s portfolio. In the second quarter, the firm raised its stake in Exact Sciences Corporation (NASDAQ: EXAS) by 17% to 10.72 million shares, representing 2.48% of the entire portfolio. The share price of Exact Sciences Corporation (NASDAQ: EXAS) has dropped sharply so far this year due to a wider than expected loss for the second quarter. Despite that, Exact Sciences Corporation (NASDAQ: EXAS) raised its revenue outlook for the rest of the year.
Like Square, Inc. (NYSE: SQ), Shopify (NYSE: SHOP), Twilio Inc. (NYSE: TWLO) and Teladoc Health, Inc. (NYSE: TDOC), Exact Sciences Corporation (NASDAQ: EXAS) is one of the stocks in Cathie Wood’s portfolio that is getting the attention of investors all over the globe.
In the second quarter investor letter, RiverPark Funds mentioned Exact Sciences Corporation (NASDAQ: EXAS) and discussed its stance on the firm. Here is what RiverPark Funds stated:
“Despite reporting better-than-expected first-quarter revenue and EBITDA, EXAS shares were a top detractor on concerns about increasing competition, as Guardant Health presented positive data for a competing colorectal cancer (CRC) blood test. Positively for EXAS, the recommended age for CRC screening was expanded to include the 45-to-49-age population, adding roughly 20 million potential patients.
In the last year, Exact has pivoted from its single cancer screening tests (Cologuard for colon cancer and Oncotype for breast cancer) to multi-cancer screening through its Thrive acquisition, and to minimal residual disease and recurrence monitoring through its recently announced Ashion and Tardis acquisitions. Through this pivot, Exact has tripled its market opportunity from $20 billion to $60 billion.”
8. Zoom Video Communications, Inc. (NASDAQ: ZM)
Number of Hedge Fund Holders: 59
The pandemic darling Zoom Video Communications, Inc. (NASDAQ: ZM) is one of the stocks Cathie Wood likes the most. The video calling company is ranked eighth in the list of 10 best stocks to buy for the next ten years. Despite underperformance in the first half of 2021, Wood raised her stake in San Jose, California-based Zoom Video Communications, Inc. (NASDAQ: ZM) by 22% to 2.64% of the overall portfolio.
Zoom Video Communications, Inc. (NASDAQ: ZM)’s latest results and outlook hint at slowing growth as people return to the office and students go back to school. On the other hand, Zoom Video Communications, Inc. (NASDAQ: ZM) is working to boost its presence in phone calling services.
Zoom Video Communications, Inc. (NASDAQ: ZM) has witnessed an increase in hedge fund sentiment in recent months. It was in 59 hedge funds portfolios at the end of the second quarter of 2021 compared to 54 positions in the previous quarter.
Like Square, Inc. (NYSE: SQ), Shopify (NYSE: SHOP), Twilio Inc. (NYSE: TWLO) and Teladoc Health, Inc. (NYSE: TDOC), Zoom Video Communications, Inc. (NASDAQ: ZM) is one of the stocks in Cathie Wood’s portfolio that is getting the attention of investors all over the globe.
7. Coinbase Global, Inc. (NASDAQ: COIN)
Number of Hedge Fund Holders: 49
The popular ETF money managing firm snapped up 5.6 million shares of the largest US-based cryptocurrency exchange Coinbase Global, Inc. (NASDAQ: COIN) during the second quarter, making it its seventh-largest stock holding with 2.65% of the overall portfolio weighting. Coinbase Global, Inc. (NASDAQ: COIN) is one of the best candidates to watch in the list of 10 best stocks to buy for the next ten years because of the explosive growth potential of Bitcoin and other cryptocurrencies in the future.
Shares of Coinbase Global, Inc. (NASDAQ: COIN) came under pressure right after the hot IPO in April due to the sudden crypto markets collapse. However, the stock price bounced back strongly in the past couple of weeks as the crypto market cap topped the $2 trillion mark once again. Coinbase Global, Inc. (NASDAQ: COIN) has witnessed significant institutional investors’ interest since it went public. It was in 49 hedge funds’ portfolios at the end of the second quarter.
Like Square, Inc. (NYSE: SQ), Shopify (NYSE: SHOP), Twilio Inc. (NYSE: TWLO) and Teladoc Health, Inc. (NYSE: TDOC), Coinbase Global, Inc. (NASDAQ: COIN) is one of the best stocks to buy based on Cathie Wood’s portfolio.
6. Twilio Inc. (NYSE: TWLO)
Number of Hedge Fund Holders: 98
The New York-based Ark Investment Management raised its stake in Twilio Inc. (NYSE: TWLO) by 36% during the second quarter to 3.72 million shares, accounting for 2.73% of the overall portfolio. Like Zoom Video Communications, Inc. (NASDAQ: ZM), Spotify Technology S.A. (NYSE: SPOT), Coinbase Global (NASDAQ: COIN), and Exact Sciences Corporation (NASDAQ: EXAS), Twilio Inc. (NYSE: TWLO) is also a member of 10 best stocks to buy for the next ten years.
Despite the strong financial performance, the shares of the San Francisco-based cloud communications platform Twilio Inc. (NYSE: TWLO) underperformed during the first half of the year. Twilio Inc. (NYSE: TWLO) expects third-quarter revenue in the range of $670-$680 million compared to the prior estimate for $639.4 million but guided bigger than consensus loss for the third quarter.
In the Q2 2021 investor letter, Lakehouse Capital mentioned Twilio Inc. (NYSE: TWLO) and discussed its stance on the firm. Here is what Lakehouse Capital stated:
“The Fund held 20 positions as of the end of June and exited four during the year (including) Twilio. The companies we exited were sold almost entirely on the basis of their valuations getting stretched well past their norms and to levels where the return profile no longer offered the asymmetric upside that led us to invest in the first place. We dislike selling on valuation as great growth companies are hard to find and letting winners run is an important facet of a winning growth strategy, however, we’re not gluttons for punishment either and in each of those cases we redeployed capital towards other high-quality growth companies with less demanding valuations.”
5. Shopify Inc. (NYSE: SHOP)
Number of Hedge Fund Holders: 85
The e-commerce platform Shopify Inc. (NYSE: SHOP) is a member of Cathie Wood’s stock portfolio since 2017. What’s more, her firm lifted its stake in Shopify by 13% to 1.21 million shares in the second quarter. Shopify’s stock price rebounded sharply in the last two months after experiencing volatility early this year.
The Canadian multinational commerce platform generated $1.11 billion in revenues in the second quarter, up 55.4% from the past year period, and topped the consensus estimate by $60 million. Furthermore, with the strategy of reinvesting profits back into the business, the company expects to extend the revenue growth momentum in the quarters ahead.
In the Q2 2021 investor letter of RiverPark Funds, the fund mentioned Shopify and discussed its stance on the firm. Here is what RiverPark Funds stated:
“SHOP shares were our next top contributor. Shopify’s fundamentals remain stellar, with first quarter results that included $37 billion of merchandise sales, a 114% year-over-year increase, leading to 110% revenue growth for the company. Subscription solutions revenue grew 71% year over year, and SHOP also showed tremendous operating leverage, with adjusted operating expenses decreasing from 58% of revenue for 1Q20 to 36% for 1Q21.
Last year, $120 billion (9%) of US retail e-commerce sales flowed through SHOP, which was second only to Amazon and up from $61 billion for 2019. The company is still enjoying significant tailwinds as retail merchants of all sizes rapidly adopt SHOP’s software tools to display, manage and sell their products across a dozen different sales channels. We believe that the overall growth of e-commerce, combined with the development of new products and services at SHOP, will continue to drive revenue growth of greater than 50% per year over the next several years, accompanied by operating margin expansion to more than 20%, up from 15% last year.”
4. Square, Inc. (NYSE: SQ)
Number of Hedge Fund Holders: 94
Jack Dorsey’s payment company Square (NYSE: SQ) is one of the long-running stock holdings of Ark Investment Management. The firm, however, slashed its stake in Square by 26% during the second quarter to 3.65% of the overall portfolio. Square’s share price jumped 26% year to date, thanks to robust revenue growth trends and its move towards crypto markets.
3. Roku, Inc. (NASDAQ: ROKU)
Number of Hedge Fund Holders: 61
The TV streaming platform Roku, Inc. (NASDAQ: ROKU) is a member of Wood’s stock portfolio since the second quarter of 2019. The firm held 4.7 million shares of Roku at the end of the second quarter. It is the third-largest stock holding Wood’s 13F portfolio.
LRT Capital Management, an investment management firm, discussed a few companies including Roku in its second-quarter 2021 investor letter. Here is a part of what LRT Capital Management stated:
“Roku is the leading TV streaming platform in the U.S and globally. The company’s mission is to be the leading company that connects the entire TV ecosystem of viewers, content publishers, and advertisers. Roku’s business model has two parts: selling streaming devices (Player Segment), and selling streaming content such as subscriptions, ads, and video-on demand services (Platform Segment). The Player segment operates with low margins and acts as a gateway to get users hooked on streaming content. The content in turn generates very high margins for Roku, which makes the company’s business model analogous to the razor-razorblades models of success of companies in the past. The Roku platform allows users to personalize their content selection with cable television replacement offerings and other streaming services that suit their budget and needs. The company is focused on improving its scale, engagement, and monetization. First, scale is based upon the number of active accounts. Second, improving engagement grows the number of hours watched for the company. Lastly, monetizing user activity by content subscriptions or advertising drives revenue growth.
Historically, investors viewed Roku as a provider of commoditized hardware. However, we see the business as a provider of a platform for streaming services with ongoing recurring revenues as the company reduces its reliance on hardware sales for profits. In fact, over the past 5 years, the share of revenue coming from hardware sales has shrunk to just 45%, while its contribution to gross profit declined to 19%.1 We believe that the company’s strong competitive advantage is rooted in its high switching cost and scale-based cost advantages. In addition, we believe Roku is only in the beginning stages of its growth both domestically in the United States and internationally where the cord-cutting phenomenon is at least five years behind the U.S. Lastly, Roku’s capital allocation strategy has been exemplary and focused primarily on acquisitions that improve the customer experience and value of its platform. The moat, growth opportunities, and the company’s track record of capital allocation makes us believe that Roku can deliver strong investment returns to shareholders in the upcoming years…” (Click here to see the full text)
2. Teladoc Health, Inc. (NYSE: TDOC)
Number of Hedge Fund Holders: 43
The virtual healthcare services provider Teladoc Health, Inc. (NYSE: TDOC) continues gaining Cathie Wood’s confidence this year. The company’s share price plunged sharply early this year amid easing social distancing policies. However, Wood saw that as a buying opportunity. Her firm increased its position in Teladoc by 11% in the second quarter to 4.95% of the entire portfolio.
Prominent investors were getting more optimistic about Teladoc Health. The number of long hedge fund bets has increased by 1 lately. It was in 43 hedge funds’ portfolios at the end of June.
1. Tesla, Inc. (NASDAQ: TSLA)
Number of Hedge Fund Holders: 60
Elon Musk’s electric car company Tesla, Inc. (NASDAQ: TSLA) is the largest stock holding of Ark Investment Management, according to the second-quarter filings. The firm held $3.69 billion worth of stake in Tesla, representing 6.87% of the overall portfolio. Its shares remained under pressure this year due to investors’ rotation to value names.
In the Q2 2021 investor letter of Worm Capital, the fund mentioned Tesla and discussed its stance on the firm. Here is what Worm Capital stated:
“Tesla underperformed in the quarter, but we maintain our high conviction in the long-term thesis on each business model. Much like art or writing, investment research is a continuous process—it never really ends. Prices can move in either direction in any given quarter, but our advantage often comes from knowing the businesses so well that short-term fluctuations in pricing shouldn’t affect our decision-making. In high conviction positions, this patience is often rewarded, which is why research is so valuable to our process…
Tesla is in a class of its own. What many in the market seem to (still) not understand is that Tesla is not a car company so much as a complex manufacturing firm—with significant recurring software potential—growing, in our view, at a targeted rate of 50-100% YoY over the next several years. Unlike any other automotive firm in existence today, Tesla alone is a vertically integrated hardware and software business developing state-of-the-art manufacturing techniques that will revolutionize the auto industry (i.e. its Giga Presses, 4680 cells, etc.). It is a generational company and we anticipate it will eventually be the largest company in the world. Many of the conventional narratives around competition displacing Tesla’s lead are fundamentally flawed, and the many headlines surrounding Tesla’s approach to autonomy are frustratingly superficial. (As an aside, we highly recommend watching Andrej Karpathy’s, Tesla’s head of AI, his recent presentation from June: “Tesla details its self-driving Supercomputer that will bring in the Dojo era)”.
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The article 10 Best Stocks to Buy for the Next Ten Years is originally published on Insider Monkey.
Disclosure: No position.
