Catherine Wood’s macroeconomic forecasts are also at odds with those of her peers. (Photo: The Canadian Press)
Investors would be wrong to abandon innovative companies and seek refuge in established companies, says Catherine Wood, founder of innovation fund Ark Investment Management, who is touring through Montreal on Thursday for the CFA Montreal Forecasts Night.
Catherine Wood, a well-known figure in American financial media, has built a community of avid followers eager for her opposing hypotheses about the stock market and cryptocurrencies. In an interview, the American portfolio manager defended her opinion against the strategists’ consensus.
The economy is being turned upside down by new technologies that break with the past, believes Catherine Wood. “You have to go back to the era of the development of electricity, telephone and automobile to see so many innovative sectors at the same time,” she says.
His firm, Ark Investment, is trying to identify winners in five sectors: genome sequencing, adaptive control robots, energy storage, artificial intelligence, and blockchain.
Catherine Wood believes that innovative companies have tremendous potential for their shareholders. She estimates they are worth $7 trillion. “That $7 trillion will reach $200 trillion by 2030, she predicts. These companies, which make up less than 10% of the world market, will make up half of that.”
This optimistic outlook contrasts with dour sentiment among investors who are fleeing tech and growth stocks as interest rates rise, meaning the theoretical value of future earnings growth is lower. The value of its exchange-traded fund (ETF) Ark Innovation, which owns companies like Tesla, Coinbase, and Teladoc Health, has fallen 75% since its peak in January 2021.
Despite the fall, whoever the American media portrays as an “innovation evangelist” stops and signs. She rates her investment universe in the “significant bargain” range.
She acknowledges that valuations of innovative companies are high. The sector’s enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio is, on average, about four times that of the S&P 500, the leading US large-cap index. She believes that the growth prospects of innovative companies justify this assessment. “We have never seen our strategy so undervalued.”
On the contrary, betting on established companies is riskier than you think, according to Catherine Wood. She points out that traditional portfolio managers tend to take inspiration from major stock indexes. “Traditional stock indices will underperform because they represent the established order. We are concentrating on the New World.”
Yes to Bitcoin and Tesla, no to Celsius Network
Catherine Wood reiterates her optimism on major cryptocurrencies Bitcoin and Ethereum at a time when this market has been undergoing a sharp correction since early May. By eliminating intermediaries in the financial sector, blockchain has the potential to make the market more transparent and stable, “although it doesn’t appear today,” she concedes.
She is more critical of interest rate and lending platforms for cryptocurrencies such as Celsius Network, which has just suspended its transactions and in which the Caisse de dépôt has invested $150 million. “These promises of interest rates of 5% to 30%, when the distribution of traditional markets was almost nothing, have led to excesses. There were unstable platforms.”
Tesla is one of the company’s biggest investments. The executive also defended its founder Elon Musk when asked if his crusade to get his hands on Twitter distracted him from running the electric carmaker. When Elon Musk gets his hands on Twitter, Catherine Wood predicts day-to-day operations will be handed over to an experienced lieutenant.
Catherine Wood compares Elon Musk to the great inventors of the Renaissance. “There are people with strong opinions who want to make the world a better place. He’s one of them.”
Catherine Wood’s macroeconomic forecasts are also at odds with those of her peers. At a time when economists, central banks and households are watching rising inflation with concern, Catherine Wood fears the specter of deflation, a generalized fall in prices that will slow the economy.
She explains that US retailers Target and Walmart saw a sharp rise in inventories. Their executives claimed they didn’t stock the right products because of late arrivals and changing consumer habits due to deconfinement and rising inflation. In May, Walmart said nearly 20% of its inventory was products the company no longer wanted.
“Walmart is one of the best run companies,” says Catherine Wood. If it happened in a well-run company, then I think it happened everywhere.
“Retailers have an inventory problem,” she adds. The way it’s being handled is through massive discounts. When people expect discounts, they don’t buy now, they wait. It will create even more near-term weakness.”
In the longer term, breakthroughs by innovative companies will lead to “positive” deflation, she predicts. “Innovation-related deflation is a good thing. That means reduced costs, increased productivity and lower prices. It could lead to a deflationary boom in the sectors where we have identified strong innovations.”