Last week, Tesla (Nasdaq: TSLA) bulls breathed a sigh of relief.
After dropping a painful 37% from its peak of $900.40, Elon Musk’s money machine rebounded by 24%.
Last Tuesday, Tesla added $106 billion to its market value. That boost alone was double Ford‘s (NYSE: F) $52 billion market cap and larger than General Motors‘ (NYSE: GM) market cap of $82 billion.
Cathie Wood, the founder of Ark Invest, and her shareholders in the Ark Innovation ETF (NYSE: ARKK) also broke out the champagne. After a painful 30% drop over the past month, the shares closed yesterday up nearly 18% from their low on March 8.
If you follow the mainstream financial media, you may have heard of Wood.
All of her aggressively managed, active exchange-traded funds (ETFs) closed 2020 with triple-digit gains. And Ark Invest became the hottest name in the world of ETFs.
No wonder every mom-and-pop investor wanted to get in on the party.
Yet I’m not buying the recent rally. And neither should you.
As far back as January, I warned Oxford Communiqué readers about Ark Invest.
I had looked under the hood, and I found that a big chunk of Ark Invest’s ETF success was due to a single stock. Unsurprisingly, that stock was Tesla.
I also warned that the story would not end well. Sure enough, by early February, the value of Ark Invest’s fleet of red-hot ETFs began to tumble.
And last week’s rally notwithstanding, all of Ark Invest’s actively managed ETFs are down by double digits from their recent highs.
Living and Dying by the Sword of Tesla
From day one, Ark Invest has focused on “disruptive innovations” centered on everything from DNA sequencing, robotics and artificial intelligence to energy storage and blockchain technology.
In other words, it has focused on today’s “story stocks.”
But Tesla, its single biggest holding, was responsible for much of its success in 2020. Tesla soared an astonishing 719% in 2020.
And three of Ark Invest’s funds – the Ark Innovation, Autonomous Technology & Robotics (CBOE: ARKQ), and Next Generation Internet (NYSE: ARKW) ETFs – hold the maximum allowable 10% stake in Tesla.
So it’s not surprising that Wood took on the mantle of the world’s leading Tesla bull. She even upped her “bullish” price target to $15,000 per share by 2024.
To put that number in perspective… With a market cap of $14.2 trillion, Tesla’s value would equal China’s annual GDP – the second-largest economy in the world.
As Goes Tesla, so Goes Ark Invest
2021 has been a much rougher ride.
Just 2 1/2 months in, Wood’s $21.5 billion flagship Ark Innovation ETF was down more than 30% from its February 16 high. Meanwhile, shares in Tesla had closed at $563, the lowest price in more than three months.
Ever the Ark Invest cheerleader, Wood made the rounds at CNBC and Bloomberg last week. Her talking points were consistent across all networks. (You can watch her CNBC interview here.)
First, she confidently asserted that she was not worried about the recent drop in Ark Invest’s ETFs. In her view, the bull market was “broadening out” to include more strategies like value.
Second, she believed, over time, the company’s investments in disruptive technologies would pay off. In fact, she said she had doubled down on tumbling stocks like Tesla, Teladoc (NYSE: TDOC), Zoom Video Communications (Nasdaq: ZM) and Palantir Technologies (NYSE: PLTR).
Third, borrowing Steve Jobs’ reality distortion field – his ability to convince himself and others to believe almost anything with a mix of charisma and bravado – she embraced the recent sell-off in her holdings.
As she put it, “We are becoming more and more optimistic about our portfolios in this sell-off.”
That’s a heck of a thing to say after a 30% drop.
Abandon This Sinking Ark
It’s a testament to Wood’s influence that her appearances on financial TV last Monday night unleashed a monster rally in disruptive stocks the following day.
But I urge you to take her words with a grain of salt. Here’s a reality check…
No. 1: Even after the Ark Innovation ETF’s recent decline, the stocks within it remain highly valued. According to Morningstar, the median price-to-sales ratio of stocks in the portfolio is 22 compared with 2.5 for the broader stock market.
No. 2: Last week’s rally notwithstanding, Tesla is far more likely to hit $150 than $15,000 in the next few years. Competition is ramping up. Tesla has already lost its market-leading position in electric vehicles in Europe.
No. 3: No amount of talking up Ark Invest’s portfolio can revoke the law of gravity in investing. What goes up must come down.
When I warned Communiqué subscribers about Ark Invest back in January, I was a lone voice in the wilderness.
Today, I am part of a growing crowd. An ever-larger number of investors are now betting against Ark Invest, including approximately $2.31 billion against the Ark Innovation ETF. That represents about 10.8% of its outstanding float.
According to Bloomberg, the number of put options on the fund recently hit an all-time high.
The bottom line? If you invest in Ark Invest’s ETFs today, don’t expect a repeat of 2020’s gains. Once the Tesla bubble bursts, so will their performance.
If you invested in an Ark Invest ETF a year ago, congratulations. Take advantage of the recent rebound… and take your money and run.
I have seen this movie before, and it does not have a happy ending.