5 Reasons Cathie Wood’s Stock Could Double in 2022
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Many of you know Cathy Woodrenowned stock picker and founder of ARK Invest which focuses on investing in disruptive tech stocks with huge upside potential. Indeed, she is so famous that the stocks she buys in her funds are often labeled as “Cathie Wood’s actions” — actions like You’re here (NASDAQ:TSLA), Coinbase (NASDAQ:PIECE OF MONEY), Teladoc (NYSE:TDOC), Square (NYSE:SQ) and Roku (NASDAQ:ROKU).
You may also know how these Cathie Wood stocks have gone from Wall Street’s biggest winners to its biggest losers over the past few years.
During the pandemic, its stocks absolutely soared on the back of consumers embracing disruptive new technologies and the Fed providing a wall of liquidity to incentivize risky behavior in the markets. Cathie’s signature fund, the ARK Innovation ETF (NYSEARC:ARKK), soared 157% in 2020.
It was an absolutely stunning performance.
But stocks don’t go up forever. And, in 2021, shares of Cathie Wood stopped rising as consumers decreased use of new tech platforms last year and soaring inflation threatened valuations. At the end of the year, the ARK Innovation exchange-traded fund (ETF) – the same ETF that rose 157% in 2020 – fell 24% in 2021.
It was a huge reversal.
And now my team and I believe that the so-called Cathie Wood stocks should suffer another even bigger reversal in 2022, because the problem with stocks is that even if they don’t go up forever, they don’t go down either forever – and Cathie Wood shares have fallen too far, too fast to reach oversold and undervalued levels with major turnaround catalysts on the horizon.
Our reflection here breaks down into five parts:
- The economy will slow down in 2022. Driven by falling consumer confidence, a sharp decline in the household savings rate, rising interest rates pushing up borrowing costs and the end of stimulus payments, consumer spending will stagnate in 2022 Consumer spending drives 70% of the US economy. A slowdown in consumer spending will naturally produce an economic slowdown, which will make healthy growth in corporate earnings relatively rare in the market. Investors will once again focus their investment dollars in companies that can continue to generate strong growth, i.e. Cathie Wood stocks. Growth stocks will rise. Value stocks will struggle.
- Inflation will decelerate markedly this year. Inflation was the bane of Cathie Wood stocks in 2021. But inflation rates will come down significantly in 2022 as consumer spending slows, supply chain bottlenecks improve and year-on-year comparisons will become much more difficult. Throughout the year, inflation rates will drop from 7% to 5% to 3% and will probably 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 turn by the summer. This is a data-driven Fed that is used to being hawkish only when absolutely necessary. A hawkish political stance will not be necessary by the summer. Inflation will slow rapidly. Economic expansion will slow. And the labor market will likely continue to struggle with shortage issues. Faced with this data, the Fed will return to dovish policy – which, of course, will be a bullish development for growth stocks.
- The use of technology platforms by consumers 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 of only using these platforms for a full year in 2020. But now we have about a year of economic reopening, and all of those pent-up consumer demands have been exhausted. We expect consumer behavior to normalize in 2022. And these days, “normal” means accelerated adoption of technology platforms. Such accelerated adoption will help tech companies re-accelerate their growth trajectories in 2022, especially as year-over-year comparisons become easier.
- Hypergrowth tech stocks are very cheap relative to long-term estimates. And many Cathie Wood stocks have a bad reputation for being very expensive. But they’re only expensive if you look at the 2022 estimates. If you look at the 2025 estimates and beyond, the story becomes quite a different story. Square is trading at just 1.6 times its 2025 sales estimate, while Spotify (NYSE:PLACE) is trading at 2X its 2025 sales estimates. Roku is at 3.4X 2025 sales estimates. Zoom (NYSE:ZM) and DocuSign (NYSE:DOCUMENT) are both around 6X. In comparison, McDonald’s (NYSE:MCD) is trading at 6.6 times its 2025 sales estimate, 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 are showing valuations equivalent to those of zero growth blue chip stocks. It makes no sense — and provides a compelling rationale for a rise in tech stocks.
Overall, then, we believe that if Cathie Wood shares were crushed in 2021 and continued to sell in 2022, they are going to rebound tremendously over the next 12 months.
We are not alone in this reflection…
Take a look at analyst consensus 12-month price targets for some of Cathie Wood’s top stocks. Coinbase – 91% upside potential. Square — 105% upside potential. Roku – 107% upside potential. Zoom – 78% upside potential. Teladoc — 98% upside potential. UiPath (NYSE:PATH) — Upside potential of 82%.
The people who calculate the numbers for these stocks think they are grossly undervalued. We also calculated the numbers – and we agree.
Mark our words. 2022 will be a huge rebound year for hypergrowth tech stocks.
To find out which stocks you should buy now for triple-digit returns over the next 12 months, click here.
As of the date of publication, Luke Lango had (neither directly nor indirectly) any position in the securities mentioned in this article.
5 Reasons Cathie Wood’s Stock Could Double in 2022
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