By Michael Brush, MarketWatch
With political strife and worries about global warming, economic growth and debt, it’s easy to lose sight of the fact that the human race isn’t doomed just yet.
We know this because of the enormous amount of technical innovation happening everywhere — making life easier and more fun. This reminds us the world is still full of brain power, raw entrepreneurial spirit and, what the heck, I’ll say it, “positive vibes.”
“We are seeing more innovation now than we have ever seen,” says Catherine Wood, the CEO and chief investment officer of ARK Invest. ARK runs several exchange traded funds (ETFs) that invest in disruptive innovation. There can be good money in this.
The firm’s ARK Innovation /zigman2/quotes/204808965/composite ARKK +2.05% and ARK Web x.0 /zigman2/quotes/201846852/composite ARKW +1.61% ETFs are up more than 140% over the past three years, compared with about 66% for the Nasdaq /zigman2/quotes/210598365/realtime COMP +0.87% and 39% for the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.47% . Its Industrial Innovation ETF /zigman2/quotes/201937883/composite ARKQ +1.73% is up around 76% over the same time span.
Before you turn irrationally exuberant on ARK ETFs and load up on them, it’s worth pointing out that not all of its funds are winners. The 3D Printing ETF /zigman2/quotes/207801817/composite PRNT +0.73% has lagged behind the Nasdaq considerably since its July 2016 launch. It is only up around 15%.
And just because the winning ETFs have done well, this does not mean they will continue to do so. They’ve also been stinkers for long time spans. In their early days, the ARK Innovation and ARK Web x.0 ETFs suffered a multi-year stretch of underperformance compared to the Nasdaq and even the S&P 500. If it happened before, there’s no reason to think that can’t happen again. Consistent stock picking, after all, is not easy.
Still, Ark Invest has obviously been doing something right, at least lately. So it’s worth considering the firm’s favorite names in disruptive innovation. Below are five companies that look like good plays on four mega-trends. These companies were singled out by ARK in its latest webinar, and they rank among the top holdings of several of its ETFs.
Electric vehicles: Tesla
What was once just a cool car company founded by a quirky but innovative thinker has turned into one of the nastiest bull-bear battlegrounds I’ve ever seen. This one is worse than “Game of Thrones.”
Bears who are short the stock point to problems like slowing sales, dwindling cash and the arrival of major car companies like Ford /zigman2/quotes/208911460/composite F -0.74% , General Motors /zigman2/quotes/205226835/composite GM +1.48% and BMW /zigman2/quotes/200850296/delayed BMWYY +0.30% in the electric-vehicle (EV) space. Bears also cite high management turnover and the erratic behavior of Tesla /zigman2/quotes/203558040/composite TSLA +6.88% founder Elon Musk as big negatives that spell doom. They even take the low road by accusing him of drug addiction despite having no evidence for this.
Bulls say Tesla is a step ahead of everyone in the EV space, and that customers simply love its cars. Tesla’s Model 3 was once again the top-selling luxury vehicle in the first quarter. Bulls also note that Tesla has amazingly strong brand power, and that incumbent car companies have a history of failure when challenging upstarts.
After all, remember how Toyota /zigman2/quotes/200537742/composite TM -1.10% crushed the U.S. car companies on their home turf in the 1970s and 1980s? Unlike incumbents, disrupters like Tesla start with a clean slate. Tesla designed its own high-tech car factory that it claims is better at making EVs. It’s in the process of rolling out a clone in China. Because Tesla is so far ahead, “some of the traditional car makers might not survive,” says Wood, at ARK. Tesla might also be a play on ride sharing. It hopes to have 1 million autonomous-driving “robo taxis” on the road in 2020.
The bears were emboldened by first-quarter results, which saw Tesla missing big on earnings and sales. But Tesla says it can make up the shortfall, and so it reaffirmed guidance for the year. As for cash, it reported has a hefty $2.2 billion, even after covering a large $920 million debt payment.
Regardless of whether Tesla is on the road to ruin, you have to give it credit for being an innovator that pushed the world into electric vehicles. Tesla was recently a top holding of the ARK Innovation ETF, and the second-largest holding of the ARK Web x.0 and ARK Industrial Innovation ETFs.
The hidden risk: The dirty little secret of electric cars is that they are big contributors to global warming, if you believe that carbon is the culprit. EVs ultimately run on power generated by burning natural gas (NG). NG is a big source of fossil-fuel pollution because so much methane escapes in production. Electric vehicles are far from “carbon friendly.” If the public ever figures this out, the chief selling point for electric vehicles will be out the window.