[Editor’s note: “5 Reasons ‘Cathie Wood Stocks’ Could Double Over the Next 12 Months” was previously published in January 2022. It has since been updated to include the most relevant information available.]
Many of you are familiar with Cathie Wood, the famed stock-picker and founder of ARK Invest. She focuses on investing in disruptive tech stocks with enormous upside potential. Indeed, she’s so famous that the stocks she buys in her funds are often labeled as “Cathie Wood stocks.” These are stocks like Tesla (TSLA), Coinbase (COIN), Teladoc (TDOC), Block (SQ) and Roku (ROKU).
You might also be familiar with how those stocks have gone from Wall Street’s biggest winners to its biggest losers.
During the pandemic, Cathie Wood stocks absolutely soared. This was thanks to consumers embracing disruptive technologies and the Fed injecting liquidity into the markets to incentivize risk-taking behavior. Cathie’s signature fund, the ARK Innovation ETF (ARKK), skyrocketed an amazing 157% higher in 2020.
It was an absolutely jaw-dropping performance.
But stocks don’t rise forever. And, in 2021, Cathie Wood stocks stopped going up. Consumers decreased usage of new technology platforms last year, and red-hot inflation threatened valuations. By the end of 2021, the ARK Innovation exchange-traded fund (ETF) — the same that rose 157% in 2020 — dropped 24%.
It was an enormous reversal.
2022 Rebound for Cathie Wood Stocks
Now my team and I think that so-called Cathie Wood stocks are due for another, even-bigger reversal in 2022. The thing about stocks is that while they don’t go up forever, they also don’t go down forever. Cathie Wood stocks have fallen too far, too fast to oversold and undervalued levels. And there are some major turnaround catalysts on the horizon.
Our thinking here breaks down into five components.
The Economy Will Slow in 2022-23
Driven by plunging consumer confidence, a sharp drop in the household savings rate, rising interest rates driving up borrowing costs and the end of stimulus payments, consumer spending will fall in 2022. This spend drives 70% of the U.S. economy. And a slowdown in consumer spending will naturally produce an economic slowdown. That will make healthy corporate earnings growth relatively scarce in the market. Investors will re-concentrate their investment dollars into companies that can continue to produce strong growth — i.e. Cathie Wood stocks. Growth stocks will rise. Value stocks will struggle.
Inflation Will Meaningfully Decelerate
Inflation was the bane of Cathie Wood stocks in 2021. But inflation rates will dramatically cool in 2022 as consumer spending slows, supply chain bottlenecks improve and the year-over-year comps get much harder. Throughout the year, inflation rates will fall to 3% and will likely settle around 2% in late ’22 or early ‘23. Accelerating inflation killed Cathie Wood stocks in 2021. Decelerating inflation will boost them in 2022.
The Fed Will Make a Dovish Pivot
This is a data-driven Fed with a history of only being hawkish when it’s absolutely necessary. A hawkish policy stance will not be required by the end of the year. Inflation will be decelerating rapidly. Economic expansion will be slowing. And the labor market will likely continue to struggle with shortage concerns. In the face of that data, the Fed will revert to a dovish policy stance. Of course, that will be a bullish development for growth stocks.
Consumer Tech Usage Will Reaccelerate
Consumers didn’t stop using tech platforms in abundance in 2021 because those platforms weren’t useful. They were just sick and tired of using nothing but those platforms for a full year in 2020. But we are now over a year into the economic reopening. And all those pent-up consumer demands have been exhausted. We fully expect consumer behavior to normalize in 2022-23. And in this day and age, “normal” means accelerated adoption of tech platforms. Such accelerated adoption will help tech companies re-accelerate their growth trajectories in 2022, especially as the year-over-year comps get easier.
Cathie Wood Stocks Are Very Cheap Relative to Long-Term Estimates
And many get a bad rap for being very expensive. But they’re only expensive if you look at 2022 estimates. If you look at 2025-plus estimates, the story becomes much different. Block is trading at just 1.6X its 2025 sales estimates, while Spotify (SPOT) is trading at 1.2X its 2025 sales estimates. Roku is at 1.4X 2025 sales estimates. Zoom (ZM) is trading at 5.3X, and DocuSign (DOCU) is at 3.9X. For comparison, McDonald’s (MCD) is trading at 7.6X its 2025 sales estimates, and Coca-Cola (KO) is trading at 5.6X 2025 sales estimates. So, in other words, hypergrowth tech stocks have corrected low enough that, based on 2025 estimates, many feature equivalent valuations as blue-chip, zero-growth stocks. That makes no sense — and provides compelling rationale for a move higher in tech stocks.
The Final Word on Cathie Wood Stocks
Overall, we believe that while Cathie Wood stocks were crushed in 2021 and ‘22, they’ll rebound enormously over the next 12 months.
We’re not alone in that thinking…
Take a look at the consensus 12-month-forward analyst price targets for some of the top Cathie Wood stocks. Coinbase — 44% upside potential. Block — 58% upside potential. Roku — 104% upside potential. Zoom — ~20% upside potential. UiPath (PATH) — ~40% upside potential.
The folks who run the numbers on these stocks think they’re way undervalued. We’ve run the numbers on them too — and we agree.
Mark our words. 2022 will be a huge rebound year for hypergrowth tech stocks.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.