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Investing in innovative technologies
We are in the midst of a technological revolution, and for investors this can be seen as a once-in-a-lifetime opportunity to invest in companies that will transform our future. But spotting these opportunities in either a bull or bear market with pronounced market volatility can be a challenge. An expert that we can glean insight from is Cathie Wood, CEO and chief investment officer of Ark Invest, who has a distinct focus on investing in areas of innovation. In her recent virtual webinar during the Charles Schwab IMPACT conference, she highlighted some of the key themes investors hoping to maximize their returns may want to look out for as they explore companies that are at – or will soon be at – the forefront of innovation.
Diversify into liquid stocks during a bull market.
During the pandemic, Ark’s strategy was concentrated in roughly more than 30 flagship names, but as the market transitioned into bull territory, Wood says she started to diversify her portfolios and “move toward names that are larger and more liquid but are still very much focused on innovation.
” Higher liquidity means lower risk since there is a higher probability of another buyer or seller on the other side of the trade. Stocks with higher liquidity tend to have lower volatility which is a great way to manage risk in changing market environments.
Seek exponential growth rates.
Growth rates measure how quickly a company’s profitability is growing over a period of time. When evaluating a stock, it’s important to look at the company’s growth rate to estimate how it will increase its cash flows in the future. Wood focuses on investments with exponential growth rates. “The growth rates that we have for our companies during the next five years are pretty spectacular,” she says. “Exponential growth means something like growth rates somewhere between the 20% and 50% range in revenues consistently over the next five years, and in some cases even higher than that,” she says. A steady growth rate assumes that a company’s business is growing and that in turn tends to coincide with higher stock valuations.
Explore opportunities in the crypto market.
Cryptocurrencies are a new asset class that have their own risks and experience a higher degree of volatility compared to other asset classes. Despite the nascency of digital assets, more institutional money is going into cryptocurrencies like Bitcoin and other crypto assets. The consequence of that, Wood says, is increasing its value. “If institutions moved 5% of their assets into Bitcoin, what would happen to the Bitcoin price … it would add roughly $500,000 to Bitcoin’s price,” she says. As the market capitalization of the crypto markets increases, it’s giving investors more confidence to move their money into digital assets, Wood says. Ark started investing in Bitcoin in 2015 and Wood said she believes “we’re just at the beginning.”
Pursue electric vehicle investments.
There are more opportunities to invest in electric vehicles as newer EV companies gradually take market share from traditional car companies. The EV market is growing as the demand and number of vehicle sales increases in markets around the world, particularly in China. Automakers are investing large amounts in the EV space. General Motors Co. (ticker: GM) and Ford Motor Co. (F) announced earlier this year that they increased their investments in electric vehicles to the tune of billions to offer zero-emission electric vehicles to scale. A big player that has been making waves in EV innovation is Tesla Inc. (TSLA), which is up about 113% year over year. Wood has been outspoken in her conviction with TSLA as a pure play on EVs. ARK Innovation ETF (ARKK) has the prominent EV company as its largest holding with a roughly 10% allocation.
Watch for opportunities in biotech.
There is a lot of innovation taking place in the health care sector as biotech companies develop new methods to address cancers, viruses, diseases and other medical conditions. There are ongoing developments in therapeutics as the costs and computing power of human genome sequencing have gotten lower. Investors can get a piece of this innovation by allocating some of their capital to groundbreaking technologies in healthcare. “The convergence of DNA sequencing and artificial intelligence will be able to help doctors spot when a body is setting up to mutate … it would be amazing to head that off at the pass,” Wood says.
Monitor disruption in artificial intelligence.
Ark Invest prides itself on investing in companies that will change the future. Artificial intelligence is a key segment of that disruption. “Every industry is going to be transformed by artificial intelligence,” Wood says. AI could be a promising area for investment given that many companies have yet to tap into this technology. Wood says there will be widespread utility among companies across many industries where businesses and consumers will adopt AI in the years to come. Companies that adopt AI early may be the ones to profit most. AI will increase automation and can help reduce costs for products like cars, trucks, planes and buses. Apart from transportation, AI and robotics are set to disrupt the health care, manufacturing, finance, education and big data market segments. As a result, market capitalization in AI, Wood says, is “going to scale in 10 years to $80 trillion.”
Investments for innovation, according to Cathie Wood:
- Diversify into liquid stocks.
- Seek exponential growth rates.
- Explore opportunities in the crypto market.
- Pursue electric vehicle investments.
- Watch for opportunities in biotech.
- Monitor disruption in artificial intelligence.