TDOC - ARKG: Market May Ridicule ARK But You Shouldn't Ignore Their Genomics ETF

Summary

• ARK Invest does great deep-dive research. Utilize their insights along with market timing considerations to generate alpha.
• The performance of ARKG is dictated mostly by interest rate decisions in the current environment. But underneath the macro layer, there are many promising tailwinds germinating in the background.
• I believe ARKG is bottoming out, and you should be waiting for the last few triggers to materialize to initiate a buy position.

Introduction

I have always maintained that Cathie Wood and ARK Investment Management LLC - perhaps best known for its ARK Innovation ETF ( ARKK ) - do excellent research that goes much deeper than the quarterly outlook myopia present in Wall Street. If one combines the very important temporal drivers with the strong fundamental assessment of specialist deep research firms such as Ark Invest, I suspect one can do quite well in their investments. Indeed, that is what I attempt to do here as we look at the burgeoning genomics sector:

ARKG: Exposure to Cutting-Edge Genomics

The ARK Genomic Revolution ETF ( ARKG ) tracks the technological and scientific developments in genomics. Here's what the ARKG exchange-traded fund's ("ETF's") exposure looks like:

ARKG ETF Top 5 Holdings

The top 5 holdings in ARKG are Exact Sciences ( EXAS ), Ionis Pharmaceuticals, Inc. ( IONS ), Pacific Biosciences Of California ( PACB ), Teladoc ( TDOC ), and Incyte ( INCY ).

All the top 5 holdings belong to the Healthcare sector. Within this sector, 69% of the representation comes from the Biotechnology industry. Biotechnology companies characteristically have high R&D costs, and their stock prices often move very sharply when R&D efforts are successfully converted into monetizable streams of revenue with a large total addressable market. My previous analysis on NovoCure ( NVCR ) illustrates a robust method of evaluating such stocks.

ARKG's top 5 holdings make up 30.4% of the total exposure. This indicates moderately concentrated exposure. More important, however, is the fact that Exact Sciences makes up almost 12% of total exposure. In my view, this is high concentration. Investors with experience reading many 10-Ks closely would note that companies typically determine the 10% cutoff as a benchmark for admitting concentration risk.

Fundamental Drivers for the ARKG ETF

Commercialization of R&D

Progress of R&D efforts is a key monitorable for ARKG. Given Exact Sciences' large weight in ARKG, a key set of developments I am keeping an eye on is the commercialization of Cologuard 2.0, which is expected to lead to more accurate diagnoses of colorectal cancer, by reducing false positive rates by 30% , along with a 5-10% better unit profitability economics.

Currently, Cologuard 2.0 is awaiting FDA submission and approval. It remains to be seen how long this will take. I anticipate these two events to be a key driver for the stock and, hence, ARKG:

In addition, I am also tracking the Exact Sciences' $25bn multi-cancer screening opportunities as it undergoes prospective study trials:

$25bn is more than 12x the company's current base of FY22 revenues. This highlights the large growth potential for ARKG via the top holding.

Dramatic Improvements in Pre-Clinical Research Costs, Timelines?

According to scientist and analyst Alexandra Urman and other scientists , implementation of technologies such as neural networks to decode protein structure shapes more efficiently could reduce costs of pre-clinical trials by 52% to 79%. They can also reduce the average duration from drug discovery to Phase 1 of clinical trials by up to 50%.

Unfortunately, when I scoured the earnings transcripts of key ARKG companies, I did not find any reference to the implementation of these methods to improve business outcomes. I hope the analyst community starts to ask key genomic companies more questions based on these initiatives, which can meaningfully boost the resiliency and throughput of operations.

Don't Forget: Interest Rate Decisions Matter Most

The previous two drivers focused on bottom-up company and sector-level initiatives that are incrementally accretive to the genomic industry's value and hence ARKG.

Unfortunately, regardless of all those wonderful initiatives and improvements of the business models, scope and expectations of rapid technological progress, the Fed can play spoilsport and override all of those factors at any time.

A genomics-focused business, particularly one that is focused on R&D, has one of the longest-duration payout profiles within the growth sector world. As such, these stocks are among the most sensitive to damage from rate hikes. It is important to not be swayed by the large total addressable market ("TAM") prospects of individual companies. I have discussed these mechanisms in depth in my previous coverage of growth stock ETFs .

Technical Analysis

If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post , which explains how and why I read the charts the way I do, utilizing principles of Flow, Location and Trap.

Relative Read of ARKG vs S&P 500

I anticipate a false breakdown followed by an up move from key levels. This is what I would need to see to turn bullish. ARKG/SPX500 (SPX) has declined almost 77% since April 2021. A decline of this magnitude coincides with bubble pops .

Right now, the key support area from 2018-2020 is now acting as a major resistance zone, which can be further confirmed by the presence of strong wick rejections at the monthly resistance.

Standalone Read of ARKG

On the standalone ARKG chart, there has been a major resistance level at around $34. In the last few years, this level broke to the upside during the euphoric rally in 2020. More recently, this level and another monthly resistance at close to $44 are now acting as resistance due to retests happening here, which the presence of strong wicks can confirm. I believe a bottom may be forming for ARKG at the monthly support around $28. Yet, I would still need to see a false breakdown to trap in the early buyers and premature sellers, followed by a sharp rebound to confirm the existence of genuine buyers. Till then, I anticipate a range-bound price action for the time being.

Summary

Overall, I believe ARK Genomic Revolution ETF is bottoming out after a bubble pop decline. Yet, I will continue to wait for signs of a last trap for the sellers before being convinced to put on the buys for ARKG. This technical trigger may be accompanied with positive news on clinical trials of major constituents of ARKG. For now, although I would like to be bullish, to make sure I generate alpha, ARK Genomic Revolution ETF will have to be on my watchlist for a "hold" position.

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