‘We think we’re in a recession and we think a really big problem out there is inventories, the likes of which I’ve never seen this large in my career. I’ve been around for 45 years and we’re talking about the best managed companies in the world. If you’re talking about Walmart and Target, they know how to manage supply chains, so if they have problems, we think there are a lot more problems to come.’ – Cathie Wood.
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In an interview with CNBC’s CEO and CIO, Cathie Wood discusses the current state of her ARC fund, consolidating on her picks for now, and the current state of the economy. Despite the fund’s being down more than 50%, Cathie saw a record amount of inflows this week, with more than 63 million dollars in a single day, the most since the fund’s peak in 2021.
Although her fund has taken a hit and pundits have questioned her investing strategy, Cathie and her team have been completely transparent with their strategy, making their models available to the public via GitHub, and Cathie stands by her conviction that all the data is there, suggesting that the narrative doesn’t follow the numbers. She suggests that the data and the narrative aren’t aligned and that when they do align, her fund will win out.
‘We keep beating the drum here; innovation solves problems, and we have a lot of problems. We had a great rebound from COVID. It was significant because, yes, innovation solved a lot of problems. The genomic revolution, the digitalization of everything and, uh, those aren’t stopping, they are continuing except, you know, they’ve been accelerated and here we are with supply chain issues. Innovation solves problems like Russia’s invasion of Ukraine’s food and energy prices. Again, innovation solves problems.
Actually, what we’ve done and continued to do since February of 21 when we peaked is we’ve consolidated or concentrated our portfolios towards our highest conviction names, so we’ve gone from about 58 names in February 2021 to about 34 right now. What you might say is that those names which didn’t score as high in our six metric scoring system all focused on innovation, we’ve moved aside, at least for now, and moved towards our highest conviction names, and you’ve mentioned some of them, Zoom, Tesla, Roku, so we have a five-year investment time horizon.
Just to give you a sense of our flagship portfolio, enterprise values, that’s both equity and market cap and debt, enterprise market value to EBITDA, so effectively cash flow is around 69 times, so I know a lot of people say profit less technology. We are not profiting less on balance. We make the assumption that in five years, that number will be close to the market multiple on that basis, which is roughly 16 times. So in our models, we’re starting to publish our models because we really want people to understand this. We just published Zoom. We published Tesla. You can find them on GitHub. Experiment change the variables we think will move the needle, and you can see how your assumptions might work into our five-year investment time horizon.
We assume a 20 annualized headwind from declining valuations, and so our return expectation, which is quite substantial right now, is based solely on revenue growth and rising profitability. The narrative you just gave many people to cite when they’re talking about the Tekken telecom bubble and burst. We’ve analyzed our portfolio relative to that as well, because there are memes around that it’s astonishing to us that Zoom’s revenue pre-coronavirus is up roughly six-fold and the stock is almost down to where it was pre-COVID, with Teledoc up fourfold and Tesla up threefold, although Tesla has now that’s in the indexes. It has held up better than the rest of our portfolios, but that narrative in 2000, if I could just say, would suggest that by now we would be seeing negative revenue growth in our expectations for the next year and declining gross margins. We are seeing the opposite. We’re seeing north of 25% revenue growth if you’re just using consensus estimates. It’s 25. Our estimates are much higher because we’re focused on exponential growth trajectories being driven by powerful new technologies.
We were wrong on one thing, and that was inflation. Uh, being as sustained as it has been in the supply chain, I can’t believe it’s taken more than two years and, uh, Russia’s invasion of Ukraine. Of course, we couldn’t have seen that. So, while inflation has been a bigger issue, I believe it has set us up for deflation.
The other thing that’s going on is that the consumer is railing against these price increases. Consumer sentiment as measured by the University of Michigan, which we think is the best measure of there. It is down to record low levels below 0,809, below 80, and 81. I had just begun my career when inflation and interest rates were in the double digits, 15 to 20%, and consumer sentiment today is lower than it was back then.
Most interestingly in the last report, many people think that the heavy spenders will keep this thing going. Consumer sentiment in the highest income groups is lower than in the lowest income groups. And the latter group is being really tormented by food and energy prices which is really a regressive tax increase.’
What do you think of Cathie’s thoughts here? Do you agree with the earnings not being aligned with the stock growth?
[This article is a transcription of a video made by Only The SAVVY]
Original video: https://youtu.be/nYNQfW5xT1g ]