In this article we presented the 10 best stocks to buy and hold for 5 years according to ARK's Cathie Wood. Click to skip ahead and see 5 Long-Term Stock Picks According To Cathie Wood.
Having one of her best years in the history of professional money management, ARK Investment Management founder and CEO, Cathie Wood sees 20% returns after 'unbelievable' 2020. "Oh, it's been unbelievable!" said Cathie when asked about what it feels like to achieve such milestone in her career in an interview with Bloomberg.
"ARK Investment Management is a registered investment adviser in the U.S. Securities and Exchange Commission. Founded by Cathie Wood, ARK's goal is to focus solely on disruptive innovation while adding new dimensions to research. ARK uses an approach that cuts across sectors, market capitalizations, and geographies," according to the description of ARK's official website. ARK focuses on large-scale investment opportunities in the public markets resulting from technological innovations centered around DNA sequencing, robotics, artificial intelligence, energy storage, and blockchain technology.
"The coronavirus created tremendous number of problems and our portfolios are all about solving problems." Cathy stated. "Our investors have been rewarded for helping to solve some of the world's most profound problems." She added, talking about how she and her company made their investors earn despite the pandemic.
Cathy was also asked if she is enjoying her current celebrity status and here's how she responded, "I am enjoying the celebrity(status). It's fun. I love what I'm doing. I love the team I'm working with, I love our research, I love bringing life to new ways of looking at the world, helping people understand how the world's going to change not only their investment portfolios but also in their own lives, their children's lives, their grandchildren's lives. Helping them understand how to move everyone to the right side of change and really benefit from the exponential growth trajectories that are just taking off now."
Directly speaking, Cathy mentioned that, whenever things have gone this well for her, usually there's a correction waiting around the bend. She said that when this correction comes, she wants to be prepared, that she must protect the earnings on the table and to also prepare their investors for the possibility of acquiring 'some' losses and say, "Just keep some powder dry because what we're looking at here are long-term exponential growth trajectories." According to Cathy, no one can stop progress so people must learn to embrace it. "I just have to keep my eye on the prize." Cathy exclaimed, saying that we must always expect corrections and we must be prepared for corrections. Nothing is straight up in the investment world and we will always experience these corrections. For Cathy, sometimes investors must take a bit of their money off the table and keep some powder dry in order to somewhat protect their investments from getting burned by these pullbacks.
Asked about being concerned for the consequences of having a bad year, Cathy responded confidently, "One bad year would not worry us. Our investment time horizon is five years." She also emphasized that they have projections which they develop from the top-down approach, trying to understand how technologies are going to scale and also from the bottom-up approach, about how companies are going to embrace these new technologies and ride their coattails.
"For the next five years, we believe that our returns will compound at an annual rate of something in the 20% range." Cathy projected. Traditional equity returns have been in the seven to eight percent range over time and that is why they believe there's still a lot of room or runway ahead. She made Amazon as an example of the stock she bought in the early 2000s, where people derided her decision to buy because of the thought process back then that focused on the tech and telecom. She highlighted that their portfolios right now are filled with 'Amazons', like a seed that were planted in the tech and telecom bubble that has been gestating all this time and now are trying to break out to growth trends.
"We expect more than a doubling in our portfolio over the next five years." Cathy stated with full confidence when asked about achieving double returns five years from now. She was also questioned about which of her current holdings will supply the biggest lift and so she answered, "Tesla is still in the running but I would have to say, the biggest upside surprises are going to come from genomic space." According to Cathy, that is because the convergence of DNA sequencing, artificial intelligence, and gene therapies are going to 'cure disease'. This convergence enables us to anticipate diseases and cure them potentially.
A big surprise in Cathy's portfolio attribution is that the four biggest contributors to the S&P 500 namely, Apple, Microsoft, Amazon, and Facebook gave her only 20 points out of 600 points. Cathy acknowledged, "We're not saying they'll be bad stocks at all, in fact, they've been very good stocks and they were a part of our portfolios in the early days." She then emphasized that "But as they were scaling into the trillion-dollar category, we believe that our research should better focus on the next set of 'FANGs', and we actually think that the next 'FANGs' are in the genomic age. " That is why if you'll notice their flagship portfolio, the largest exposure is in healthcare.
Cathy implied that their 'minimum' hurdle rate of return is 15% at a compound annual rate over the next 5 years and if their stocks lose the return expectation and drop below the 15% threshold, they would definitely move back towards some of their old FANGs because they would be treating those stocks as 'cash-like' instruments in relation to their strategy. She also stated that as the bull market extends, they move into more cash-like equities which are the less volatile stocks.
Talking about bitcoin, Cathy and the ARK's position on this particular asset is currently worth 7% of their total equity. She said they are still optimistic about bitcoin despite being at $20 thousand, then down to $17 and even below $4 thousand earlier this year. They are still optimistic because they learned that bitcoin threw off unqualified income which is not illegal. "We are extremely bullish. Our confidence has gone up since 2017 because what we saw as it dropped from 20,000 to below 4,000, it actually got in well into the threes in 2019." she added. "Bitcoin is the reserve currency of the crypto ecosystem, which is very important. It's the flight to safety currency. Bitcoin's blockchain is the most secure of any other blockchain."
Cathy was also interviewed about the hate speeches she received from the investors who went short on Tesla when she tweeted a letter to Elon Musk in which she effectively put a bullish price target of $4000 to Tesla. When asked if she had any regrets (on her tweet to Elon), she replied, "Oh no, not at all. I didn't read the Twitter world of hate notes to me. We were standing up for what we thought was right and we also were astonished at the backlash." She also said that "He (Elon) is a provocative soul and he is brilliant! He's our renaissance man and what we should have done is keep our eye on the prize. We believe that Tesla will be in a poll position to dominate because of its advantages in artificial intelligence and the amount of data it has collected and the A.I. expertise that it has." According to her, Tesla's battery technology was already three to four years 'ahead' of the competition. Tesla has 15 billion miles of real world driving data collected and the next closest is Google with 25 million.
"I know we've been gratified to see how beautifully we're scaling and getting our message out which has helped our distributors." This is how Cathy responded when catechized about how she and her colleagues have harnessed social media as a tool for marketing and a tool to disseminate their ideas. ARK was founded last 2014, it only has 26 employees but it is handling $50 billion worth of assets. "What goes around, comes around. One of ARK's mission is to educate people or the average investor about how their lives were going to change and how they might capitalize on these changes in their portfolios. " she remarked. "There's a virtuous cycle at work here and there's also a bit of a viral network effect taking place. I do think it's happening and I'm thrilled to be a part of it."
Cathie believes that there are five technology platforms that are changing the world today namely, artificial intelligence, robotics, energy storage, DNA sequencing, and blockchain. Asked if there could be a sixth, she responded, "We're looking closely at quantum computing." She based it on her experience of meeting a lot of professors from around the world, focused on the next big thing which is quantum computing. It was always in view of at least 10 years, but now we have the first little baby, which is the rudimentary quantum computers.
When the talk was shifted about why Cathie chose the actively managed ETF as the wrapper for her strategy, this is what she said, "From a research point of view, we were asking ourselves why is that happening? We didn't know anything about ETF's and so we looked at what an ETF is and understood that there were four reasons that ETFs were starting to take share." Based on Cathie's research, ETF's are (1) more transparent, (2) more liquid, (3) they are lower in cost compared to mutual funds, and (4) they didn't have hidden fees. "And so for those four reasons, I just asked the question, why don't we put our fund into an ETF? This sounds like a good deal." she stated.
Everyone can start to wonder why Cathie didn't start a hedge fund because from a self-interested standpoint, she could definitely have been a lot richer than her current net worth. "I felt that the right thing to do was go where no one was and I've had good success over the years doing that." this is how she replied.
Cathie was also inquired, "Why not extend your investment thesis to private markets and raise money to invest in venture capital and in growth equity?" According to Cathie, one of the reasons was the low-hanging fruit in the public equity markets. Innovation had been neglected in the public markets. It had become overvalued in the private markets. "We are evolving some strategies and we hope that next year, we'll be able to launch something." she stated. "I would love to be able to offer a public-private option that would be available for all retail investors right now."
The ETF's of Cathie and ARK alone are generating an annualized run rate of $220 million in revenue. How profitable is this business? "It's very profitable now but believe me, the blood, sweat, and tears that we left in the early days-- It's a scalable model so we had to pay for the infrastructure in the early days and we were quite the loss-making company." said Cathie. She also stated that they were able to scale and have found the right talent in place. "I'm very happy to say that we are able to reward those who are making us happen."
For Cathie, the Japanese market is a very interesting market. A lot of clients and investors basically tell their distributors what they want to see, and so Cathie and the ARK learned from them. ARK's fintech portfolio came out of Japan. In the US, they have a space exploration fund and also an SDG fund (Sustainable Development Goals) and these are being monitored closely by Cathie and her group.
At the ending part, Cathie was asked, "If you had to build ARK all over again, what would you do differently?" She responded with a smile and said, "Oh! Probably we had to pivot because I told you I funded it for the 1st three to almost four years. Two and a half were there at 40 million dollars. We built it. They did not come and I would not have built a captive distribution at the time but I would have been more aggressive about finding a distribution partner sooner."
In the perspective of Cathie Wood, the one thing every woman in finance should want generally is a great place to develop a good track record. "Building one's track record long enough usually is a ticket to more success. I always say, try and figure out a way to measure your success in a way that you know no one can take it away from you." She appended, "I have the highest regard for the industry. It is a heck of a lot of fun! It's extremely challenging. Solving the world's problem out there can't be anything more satisfying."
So, Cathie Wood sounded more bullish about genomic stocks than Tesla, but you will be surprised when you find out where she put most of her money. Let's take a look at Cathie Wood's 10 best stocks to buy and hold for 5 years:
10. Proto Labs, Inc. (NYSE:PRLB)
Proto Labs, Inc. (PRLB) is a 3D printing company that returned more than 50% in 2020. Cathie Wood had a nearly 3.1 million share position at the end of September, making PRLB her 10th best stock to buy for the long-term. The position was worth $400 million at the end of September, but its current valuation is around $470 if left unchanged during the 4th quarter.
Major hedge fund managers has been shunning the 3D technology company as the total number of bullish hedge fund positions stood at 16 at the end of September. The second biggest hedge fund equity position belonged to Motley Fool Asset Management at less than $6 million.
9. LendingTree, Inc. (TREE)
TREE ranks 9th in our list of the 10 best stocks to buy and hold for 5 years. Cathie Wood had $413 million invested in this stock at the end of September. Again she was by far the most bullish fund manager about this stock. The second largest equity holder of TREE in our database was quant hedge fund Two Sigma with a position valued at less than $13 million at the end of September.
Bernzott Capital Advisors talked about TREE in its Q1 investor letter:
"“LendingTree (TREE): $2.6 billion market cap – Based in Charlotte, NC, the company operates an online marketplace for all types of consumer loans, including mortgage, home equity, auto, personal, and credit cards. TREE also offers a marketplace for all types of insurance and deposits, matching over 700 lenders with millions of consumers. TREE is not a balance sheet lender itself, thus assumes zero credit risk. TREE enjoys a ~31% share in its core market, generates strong margins and is led by an owner-operator CEO who is the second largest shareholder with 13% of the stock worth ~$500 million. The company is in the early stages of penetrating a large mortgage market opportunity, with room to grow from its current less than 2% of annual mortgage originations. TREE should to benefit from the secular shift by domestic financial services firms shifting ad spending to online. We initiated and then added to the position during the quarter, with the stock trading at an attractive discount to fair value.”
Cathie Wood probably believes that TREE will disrupt the mortgage origination market.
8. Teladoc Health, Inc. (NYSE:TDOC)
TDOC ranks 8th in our list of the 10 best stocks to buy and hold for five years. Cathie Wood had $441 million invested in this telemedicine stock at the end of September. TDOC shares returned more than 130% in 2020. Telemedicine offers a convenient and lower cost alternative to medical office visits, and may even help lower overall medical expenses as more people take advantage of preventive annual doctor visits. However, Baron Discovery Fund thinks the stock might be overpriced at the moment. Here is what they said:
“We sold our remaining investment in Teladoc Health, Inc., one of our most successful investments ever. Our view was that the company’s valuation felt a bit extended, and its market capitalization at over $19 billion was too large for the Fund to hold. Moreover, we believe that, on a pro-forma basis, the market cap will be around $40 billion after its recent bid to merge with Livongo Health, Inc., a transaction expected to be completed in the fourth quarter. We hold Teladoc’s management in the highest regard and admire the incredible company it has built over the last few years.”
7. 2U, Inc. (NASDAQ:TWOU)
TWOU ranks 7th in our list of the 10 best stocks to buy and hold for five years. Cathie Wood had nearly $500 million invested in the stock at the end of September. TWOU shares returned 67% in 2020. Quant hedge fund D.E. Shaw and Greenvale Capital are among the large hedge fund holders of the stock but their positions pale in comparison to ARK Investment's.
We previously highlighted 2U in our article about the best artificial intelligence stocks to buy and said the following:
2U is an education technology company providing front-end and back-end cloud-based SaaS technology services to Universities. In August 2U, Inc. and Columbia Engineering announced a “partnership to deliver the Columbia Artificial Intelligence Program”. The $2.7 billion market cap company aims to be a leader in the digital transformation of the higher education market.
There were a ton of insider purchases in TWOU shares back in 2019 when the stock was trading at $15. Those insiders made more than 160% in less than 18 months.
6. Zillow Group, Inc. (NASDAQ:Z)
Zillow ranks 6th in our list of the 10 best stocks to buy and hold for the next 5 years. Cathie Wood had nearly $500 million invested in this stock and for the first time today she doesn't have the largest position in a stock. Karthik Sarma's SRS Management was the largest hedge fund holder of Zillow with a $871 million position at the end of September. Here is what Baron Partners Fund said about the stock recently:
“Zillow Group, Inc. operates leading U.S. real estate sites, a mortgage marketplace, and the Zillow Offers home-buying business. Shares were up on strong second quarter results driven by record top-of-funnel metrics and a favorable newly public comp for the Offers business. In our view, Zillow is well positioned to penetrate the large online real estate advertising opportunity with substantial upside from Offers, which could grow the company’s addressable market in both houses to be bought/sold and leads provided to Premier Agents, as well as from Zillow Home Loans.”
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