Only a couple of weeks ago, which in 2022 stock market terms feel like a couple of years, I got some reasonable pushback on my ARK Innovation ETF (ARKK) - Get Free Report thesis. As a refresher, I believe that investors should wait for share price to show signs of life before jumping in.
But as a reader pointed out: why wait to buy the ETF at a higher price? Shouldn’t investors take advantage of the current 60% dip from the all-time high to accumulate?
The past few days of trading have helped to answer these questions. Below, I discuss when investors should consider owning ARKK to, hopefully, ride the eventual upside.
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ARKK: investing in innovation
There are only two major parts to my theory on Cathie Wood’s ARK Innovation ETF. The first argues for buying shares of the fund, while the second informs the right time to do so.
Regarding the first piece, I believe that growth stocks are positioned to produce better returns than the average stock in the market. Philosophically, I think this is the case because innovation and ambition carry more risk, and investors want to be better compensated for assuming it.
This has been the case in the past decade or so. The graph below, in log scale, shows that large-cap growth has outperformed large-cap value since 2012, more so since late 2017.
To me, it is hard to argue against Cathie Wood and her team’s investment ideas — see quote below. So, given enough time, I would not be surprised to see ARKK beat the S&P 500 on an absolute return basis.
“We believe innovation is key to long-term growth of company revenues and profits. Our mission is to deliver long-term capital appreciation with low correlation to traditional investment strategies by identifying and investing in the leaders, enablers and beneficiaries of disruptive innovation.”
ARKK: don’t time bottoms
But then comes the crucial second piece of the thesis: buying growth and innovation at any cost is imprudent. Just ask any investor that accumulated shares of ARKK one year ago and watched the price slide from $156 to $62.
The other common pitfall to avoid is trying to guess where the bottom might be. I have suggested that a floor in ARKK could be forming in the mid-$60s, but there is no guarantee that ARK Innovation will not dip further from those levels.
Therefore, more important than guessing “how cheap is cheap enough”, I think that investors should buy ARKK only after the ETF has shown clear signs of positive momentum. One method that can be used here is a simple moving average.
The chart below compares two different strategies: (1) buy and hold ARKK since right before the start of the pandemic, in orange, and (2) own ARKK only when its price is above the 50-day moving average. Clearly, paying attention to price and momentum has paid off here.
Recent price action proves the point
Since I was called out for only wanting to buy ARKK when its share price catches up with its moving average, in early February, ARK Innovation has declined another 16% to around $62. Clearly, patience has been rewarded.
I believe investors should continue to be diligent and to wait until this ETF finds its footing again — even if doing so means losing the initial 15% or 20% pop from the bottom. Currently, ARKK’s 50-day moving average is at $81, and this is my entry point today.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)