Cathie Wood.
Courtesy Photograph
Disruption-stock guru Cathie Wood has become an important voice for bullish Tesla investors, so when her ETF, ARK Innovation, buys or sells the shares, it is news. The risk for investors is overreacting.
Closely following what is going in a favorite stock is a good idea. Responding to all the daily data points is less so.
Wood’s ARK Innovation ETF (ticker: ARKK) sold more than $200 million in Tesla stock in recent days, based on data compiled from Bloomberg.
Big sales are potentially alarming for bulls, but ARK’s recent moves are most likely typical portfolio-management activity. Institutional investors often have internally imposed limits on the size of the positions they hold. And ETFs have daily inflows and outflows of investment dollars they have to manage.
ARK didn’t immediately respond to a request for comment about the recent sales, but the ETF still has a lot riding on how Tesla does. Tesla stock remains the largest holding in the ETF by a factor of almost two.
The stock has also outperforming other components of the ETF over the past few weeks. The stock accounts for an increasingly large percentage of the ARK Innovation portfolio just because of that fact alone.
Tesla shares have gained about 9% over the past month. The next 10 largest positions, including Teladoc Health (TDOC), Roku (ROKU), Unity Software (U), Coinbase (COIN), Zoom Video Communications (ZM), Square (SQ), Shopify (SHOP), Spotify Technology (SPOT) Twilio (TWLO) and Palantir Technologies (PLTR), are down about 10% on average over the same span.
It’s a large drop for the other 10 stocks, but not a surprising one. Growth stocks such as the ones Wood’s fund holds are expected to generate most of their earnings and cash flow years from now, and higher interest rates, such as those seen recently, tend to reduce the current value of future earnings. The yield on 10-year U.S. Treasury debt has gone from 1.45% to 1.54% this week.
Tesla, also a growth company, has managed to buck that trend because of factors specific to it. Investors have felt more optimistic about the stock since the company launched more sophisticated versions of its autonomous-driving software this past Friday, and as delivery estimates for the third quarter have inched higher.
Wall Street is expecting roughly 225,000 vehicle deliveries for the third quarter of 2021, up from closer to 221,000 deliveries a few weeks back.
Tesla stock is up about 0.3% for the week. The Nasdaq Composite, home to many richly valued tech stocks such as Tesla, has lost more than 3%. Near midday on Wednesday, Tesla stock was down about 0.3%, while the S&P 500 and Dow Jones Industrial Average had both gained roughly 0.3%.
Tuesday, when the Nasdaq dropped 2.8%, Tesla shares lost only 1.7%.
It is possible that Wood is feeling differently about Tesla stock these days. But her published target for the share price is $3,000 by 2025, implying an average annual gain of roughly 40% for the next few years, from near $780 today.
Write to Al Root at [email protected]
