META - Analyzing 13Fs: ARK Investment Management (Cathie Wood) Q3 2023

2023-10-21 03:29:32 ET

Summary

• Cathie Wood and ARK Investment Management have abandoned their "soft landing" theory and are actively preparing for other scenarios.
• ARK now expects an "economic landing stronger than soft", while facing more than a billion in net fund outflows since the onset of the year.
• Still, Cathie's ETFs, including her flagship ARK Innovation ETF, have been actively outperforming market indices on a year-to-date basis, heavily benefiting from the tech recovery tailwinds.
• ARK has expanded positions in companies like Roblox, Palantir, Archer Aviation, and Teradyne, while reducing positions in Tesla, Coinbase Global, Shopify, and Exact Sciences.

In today's article, we bring you the latest update in our recurring series based on analyzing 13F filings and the latest moves of some of the world's most renowned funds and asset managers. Our original article on the matter and the original thesis behind it can be accessed through this link , and the last quarter's article can be found here .

Quarterly Overview

The 2023 market recovery has defied expectations delivering a largely unexpected 20% half-year return amidst pressing macro-economic issues and a growing distrust in the economy. The market has once again proven itself to be predictably unpredictable, yet the buildup of positive sentiment came to an end with Jerome Powell's September " higher-for-longer " address. The speech signaled to the market that more pain is to be endured before we turn the page back to normal.

Cathie Wood was seen as a staunch advocate for a soft landing, a stance that has become increasingly controversial. Recent mixed economic signals appear to have affected Cathie Wood projections as well, with her no longer expecting a "soft landing" to be a feasible reality, a position she stubbornly held for over a year. ARK now expects and actively prepares for an " economic landing stronger than soft ", as they have defined it, actively seeking opportunities presented by the growingly distrustful market sentiment toward innovation/growth stocks.

This might become more difficult over time as top ARK funds like the ARK Innovation ETF ( ARKK ) and the rest of the actively managed ETFs, including ARK Next Generation Internet ( ARKW ) and ARK Fintech Innovation ( ARKF ) have been hit with notable cash outflows. It is estimated that the family of funds has been dealing with more than a billion in net outflows since the beginning of the year. To draw a direct comparison, ARK had more than $6 billion in net inflows during the peak of their popularity in 2021, at a time when they managed more than $50 billion in assets through all of their funds.

Perhaps ironically, despite the outflows, most ARK funds have still outperformed the S&P 500 ( SPY ) and have delivered outsized returns when looking back in the short term. ARK Investment Management continued to chip away at their top holdings and some of their more successful investments, with their top ten holding concentrations declining for another quarter to 48.96% and no longer taking up half of the assets under management. They have sold out of five of their holdings and trimmed their exposure to 107 positions in the last quarter. In the same period, they added 11 new positions and increased 107 of their holdings. Top holdings remain unchanged for the quarter. The summary for the third quarter is as follows:

Expanded Positions

Roblox ( RBLX ): is one of the long-term-oriented innovation holdings that ARK has held since early 2021. The position was expanded almost every quarter, and the majority of the stake was built during 2022, when the stock was extremely volatile, trading anywhere between $24-$134 range. The holding was increased by an additional 28.50%, with ARK buying 2.65 million between $25 and $45 a share. RBLX takes up almost 3% of the AUM and trades for $30.10 per share.

Palantir ( PLTR ) : was the largest addition to their holdings during the second quarter. After the stock got crushed in 2022, it turned around and became one of the best success stories of this year, following this year's tech recovery of the likes of Meta ( META ) or Alphabet ( GOOG ). However, it is still far from its all-time highs two years ago, when it traded close to $40 per share. As a reminder, Cathie Wood was one of the early investors in PLTR and likely suffered tremendous initial losses, ultimately clearing the firm out of her portfolios in February of last year. ARK Investment Management added 2.58 million of Palantir shares during the third quarter. After the change, PLTR takes up 1.2% of ARK's AUM. New shares were added while the firm traded in the $14-$20 range. Today, the shares can be bought for around $17.20 per share.

Archer Aviation (ACHR): has been held by Cathie's team since late 2021. It was a significant increase in the third quarter however, with ARK increasing its holdings by 160%. This time around, they have added 14.62 million shares worth approximately $74.0 million at today's prices. The new shares were added in the $106-$174 range. Even if it is, percent-wise, one of the largest changes in the latest 13F, it still represents less than 1% of the firms U.S. equity holdings. Shares of the "air-taxi company are currently trading at around $152.20.

Teradyne ( TER ): is another holding that was almost fully cleared from the books a couple of years ago and is now making a big comeback. This is the second consecutive quarter where the firm is adding TER, and this time around they were added while trading in the $97-$117 range. Cathie's funds have increased their overall exposure to the test equipment designer and manufacturer by 21.38% in the third quarter. Teradyne is now taking up 1.13% of ARK's AUM, and shares of the firm can be bought for $97.00 per share.

Cathie Wood also added shares in companies like Spotify ( SPOT ), SoFi Technologies ( SOFI ), Pacific Biosciences of California ( PACB ), Ginkgo Bioworks Holdings ( DNA ), Iridium Communications ( IRDM ), and Moderna ( MRNA ), among others.

New Positions

Cameco Corporation ( CCJ ): is perhaps the only relevant addition during the quarter. CCJ is one of the world's largest uranium miners, trading near all-time highs. The shares were purchased at prices between $29.30 and $41.50 per share. ARK bought some 330,000 shares which now trades at around $37.80 per share.

While ARK Investment Management opened 11 new positions in the quarter, including AvidXchange Holdings ( AVDX ), DENTSPLY SIRONA ( XRAY ), Apollo Global Management ( APO ), Valens Semiconductor ( VLN ) and others, these are largely small positions with little impact on the overall portfolios and ETFs.

Reduced Positions

Tesla ( TSLA ): another quarter and another round of TSLA selling, marking the eighth quarter in a row in which ARK has chipped away at its most famous holding. This is the first time in a while that Musk's company takes up less than 10% of their holdings in both ARK Investment Management and the flagship ARK Innovation ETF, having represented a cornerstone of the portfolios for a long time. Cathie Wood parted ways with slightly more than 4 million shares, or an est. $191.4 million worth of Tesla during the third quarter. This move decreased her exposure by 15.8%, as TSLA now makes up 8% of ARK's assets under management after the sale. Tesla just reported a troublesome earnings report earlier in the week, informing investors of shrinking margins and increased problems with deliveries and sales of the new Cybertruck model. The market has been heavily punishing the stock, which is going to test the $200 floor soon.

Coinbase Global ( COIN ): is still a relatively new crypto-exchange company that only went public in 2021. It caught the eye of Cathie Wood almost immediately, and ARK funds started to accumulate a rather outsized position, which is now in the process being winded down at the moment. Their exposure was reduced by 12.5% this quarter, while Coinbase was trading between $71 and $110 per share. COIN is currently trading for $75.00 per share.

Shopify ( SHOP ): is another stock that caught the tailwind of the technology sector recovery and has been riding high waves in 2023, having achieved a 48.97% year-to-date return. However, ARK has decreased its exposure by 21.6% through parting ways with close to 2 million shares. After having sold an est. $107 million worth of SHOP shares, the position takes up around 3% of ARK's AUM. Shares of Shopify can currently be bought at around $52.8 per share.

Exact Sciences ( EXAS ): ARK has disposed of more than 4.2 million shares during the second quarter, now following it up with another major sell-off of more than 800,000 shares of EXAS. The exposure has been cut by another 12% and the firm now takes up just 3.3% of their US-based AUM, far from the major holding it was before. After taking tremendous losses on this position, it seems likely it will be wiped from the books soon if this trend continues. EXAS trades currently at around $65.50.

ARK's funds have also decreased their exposure to holdings like Roku ( ROKU ), DraftKings ( DKNG ), Nvidia ( NVDA ), Zoom Video Communications ( ZM ), Kratos Defense & Security ( KTOS ), Schrodinger ( SDGR ), CRISPR Therapeutics ( CRSP ), and MercadoLibre ( MELI ), among other companies.

The investment firm also closed out on several of their minor holdings like Allot Ltd ( ALLT ), Endeavor Group ( EDR ), Iovance Biotherapeutics ( IOVA ), and Codexis ( CDXS ), with their notable JD ( JD ) holding being a possible exception, which was also closed out in the third-quarter.

Final Overview

ARK believes that the adoption of new technologies can accelerate during difficult economic periods as behaviors swiftly change to meet new, rapidly evolving realities. As a result, they believe that their innovation-oriented portfolio is set to significantly outperform the market when it emerges out of the bear period. Yet, growing net outflows amid increasing distrust from their investor base may begin to undermine the plans to position themselves for an eventual short-to-mid-term bull market and better economic reality. This might have further implications for some of their major holdings, especially the more successful investments, as ARK might be forced to sell assets they still have trust in, creating a double-negative effect for underlying shareholders. If the recession deepens and more severely impacts the stock market, the effects of this might get exaggerated, thereby significantly impacting the underlying share prices. Either way, as "cheap money" becomes a thing of the past and parked cash can generate more than 5%, things are likely to get worse before they get much better for Cathie Wood and ARK Investment Management.

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