Few investment stars have risen as quickly or shined as brightly as Cathie Wood.
Wood rose from relative obscurity to tout eyebrow-raising price targets on high-growth names such as Tesla (TSLA) , Roku (ROKU) , Robinhood (HOOD) , Zoom (ZM) , and more. She has also been a major proponent of bitcoin, advocating for its inclusion on corporate balance sheets and herself buying into Coinbase (COIN) as a major position for her Ark Innovation Fund (ARKK) .
While many were quick to comment and dismiss her extreme bullishness on "disruptive innovation," her performance over the course of the last few years quickly quieted many of these critics.
Indeed, her bullishness even in the bottom of the pandemic-driven panic of early 2020 proved her prescience as an uber-bull.
"During times of fear, uncertainty, and doubt, businesses and consumers are more willing to change their behavior and seek innovative products and services that are more productive, cheaper, faster, and/or more creative," Wood wrote at the time. "As a result, innovation takes root and typically gains significant market share during tumultuous times, such as this pandemic appears to be."
However, as many of her most famous picks begin to falter in the current correction and investors begin to be wary of soaring valuations, there remains a question of how much investors can trust the prescient portfolio manager in a less exuberant environment.
One of the great successes of Wood's ETFs in recent years has been their concentrated nature.
For example, Wood's big bet on Tesla helped her portfolio outpace the market by quite a margin. Similarly, a huge stake in Teladoc (TDOC) as telemedicine took over the healthcare space amidst the pandemic profited handsomely for Wood. In short, her large positions in themes and specific industry leaders helped her push well past more diversified portfolios.
However, as many of these names begin to either tread water or trend south, Wood has felt the brunt of the punishment. In fact, she has trailed the S&P 500 by double-digits in 2021, only a year after accelerating well-beyond that benchmark.
Robert Johnson, Professor of Finance at Creighton University, told Real Money that this should have been expected.
"When liquidity and optimism are high, these kinds of firms attract capital. We have seen that over the past year," he said. "When that theme was in vogue the market in ARKK ran. That narrative is changing and she is suffering."
Homing in on this theme, Michael Burry, of Big Short fame, is perhaps the best-known investor eager to profit off of the market rotation and the ensuing pain for Wood's biggest bets.
His firm, Scion Asset Management, has actually taken short positions not only against Wood's ARK ETF, but against some of her favorite names like the aforementioned Tesla. Thus far, the bet against Wood has paid off as her flagship ARKK fund has fallen about 14% year-to-date, about the inverse performance of the S&P.
Oh Ye of Little Faith
Still, Wood remains confident in her picks, insisting that critics like Burry simply do not understand the trends that she has been able to take advantage of.
To his credit, Michael Burry made a great call based on fundamentals and recognized the calamity brewing in the housing/mortgage market. I do not believe that he understands the fundamentals that are creating explosive growth and investment opportunities in the innovation space.— Cathie Wood (@CathieDWood) August 17, 2021
Many are coming to Wood's defense in terms of her longer-term performance as well. To be sure, beating the market to the extent that Wood has in recent years is not something that should be quickly forgotten.
Robert Zuccaro, CIO of Golden Eagle Growth Strategies, was one such voice. He noted that ARKK's annualized return of nearly 50% over the past five years should most definitely be enough to give detractors pause.
"ARKK was one of 18 funds to post 100 percent-plus returns in 2020. Of these 18, 17 are significantly behind the S&P 500 thus far in the year," Zuccaro noted. "Moreover, 8 show negative returns after nine months.
He added that top decile funds tend to lag after a period of such significant outperformance. As such, Zuccaro sees the current period of trouble for ARKK as anything but a cause for concern. Further, high-PE names have proven they have plenty of gas left even at lofty valuations, in Zuccaro's mind.
"As for ARKK's holdings of excessively high PE stocks and money losing companies, some investors will be surprised that these two categories of stocks are fertile fishing grounds for finding top performing stocks," he said.
Nonetheless, even bulls are somewhat befuddled by Wood's continued sales of her most bullish calls. For example, at the close of September she sold more than 340,000 shares of Tesla, totaling about $270 million. Overall, she has sold more than half of a billion dollars in Tesla stock in a matter of months. Given her expectation of an over 300% return for Tesla still ahead, the sizable sale is one that begs questions.
That said, past performance and general transparency should certainly offer some benefit from doubt for Cathie Wood. Additionally, the over-aggression of her friend and seed-funder Bill Hwang, of Archegos infamy, offers a glimpse of the worst-case scenario should she overextend herself and not sell at opportune times to maintain liquidity.
In both Hwang and Wood's case, religious conviction plays a role in their stock-picking. Hwang dubbed his fund Archegos after the Greek epithet for Jesus as the "one who leads the way". ARK, meanwhile, takes its anime from the Ark of the Covenant. In the former case, doubt would have been advisable as market turmoil ultimately took the fund into bankruptcy. While such a nightmare scenario is unlikely in ARK's case, the recent trend of negative returns remains a significant test of investors' faith in Wood's status as a market prophet.