Major turnaround catalysts are on the horizon
1d ago · By Luke Lango, InvestorPlace Senior Investment Analyst
Many of you are familiar with Cathie Wood, the famed stock-picker and founder of ARK Invest who 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” — stocks like Tesla (NASDAQ:TSLA), Coinbase (NASDAQ:COIN), Teladoc (NYSE:TDOC), Square (NYSE:SQ) and Roku (NASDAQ:ROKU).
You might also be familiar with how those Cathie Wood stocks have gone from Wall Street’s biggest winners to its biggest losers over the past few years.
During the pandemic, her stocks absolutely soared on the backs of consumers embracing disruptive new technologies and the Fed providing a wall of liquidity to incentivize risk-taking behavior in markets. Cathie’s signature fund, the ARK Innovation ETF (NYSEARCA:ARKK), skyrocketed an amazing 157% higher in 2020.
It was an absolutely jaw-dropping performance.
But stocks don’t go up forever. And, in 2021, Cathie Wood stocks stopped going up as consumers decreased usage of new technology platforms last year and red-hot inflation threatened valuations. By the end of the year, the ARK Innovation exchange-traded fund (ETF) — the same ETF that rose 157% in 2020 — dropped 24% in 2021.
It was an enormous reversal.
And now my team and I think that so-called Cathie Wood stocks are due for another, even-bigger reversal in 2022 because the thing about stocks is that while they don’t go up forever, they also don’t go down forever — and Cathie Wood stocks have fallen too far, too fast to oversold and undervalued levels with some major turnaround catalysts on the horizon.
2022 Rebound
Our thinking here breaks down into five components:
- The economy will slow in 2022. 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 flat in 2022. Consumer spending drives 70% of the U.S. economy. A consumer spending slowdown will naturally produce an economic slowdown, the likes of which 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 is going to meaningfully decelerate this year. 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 from 7% to 5% to 3% and will likely end 2022 around 2%. Accelerating inflation killed Cathie Wood stocks in 2021. Decelerating inflation will boost Cathie Wood stocks in 2022.
- The Fed will be forced to take a dovish pivot by the summer. This is a data-driven Fed that has a history of only being hawkish when it is absolutely required. A hawkish policy stance will not be required by the summer. 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 — which, of course, will be a bullish development for growth stocks.
- Consumer usage of technology platforms will reaccelerate throughout the year. 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 about 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. 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.
Hypergrowth tech stocks are very cheap relative to long-term estimates. And many Cathie Wood stocks 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. Square is trading at just 1.6X its 2025 sales estimates, while Spotify (NYSE:SPOT) is trading at 2X its 2025 sales estimates. Roku is at 3.4X 2025 sales estimates. Zoom (NYSE:ZM) and DocuSign (NYSE:DOCU) are both around 6X. For comparison, McDonald’s (NYSE:MCD) is trading at 6.6X its 2025 sales estimates, and Coca-Cola (NYSE:KO) is trading at 5.4X 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.
