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3 Cathie Wood Stocks Beating the Nasdaq This Year

Barchart - Fri Aug 25, 2:08PM CDT

Maverick investor and fund manager Cathie Wood is known for taking outsized bets on companies where she has total conviction. Sometimes, these bets have paid off handsomely, while others have plummeted sharply after early gains - think Zoom(ZM).

However, 2023 has been a decent year for the seasoned investor so far, considering her flagship fund - the ARK Innovation ETF (ARKK)  - is edging out the Nasdaq Composite ($NASX). The ARK Innovation ETF, which manages net assets of roughly $9.3 billion currently, is up 31.3% on a YTD basis, compared to a gain of 29.3% for the Nasdaq. 

And among ARKK components, there are three stocks whose standout gains are worth highlighting on their own. Here's a look at the best-performing ARKK stocks of 2023 so far.

Tesla (TSLA)

Cathie Wood is a firm believer in Tesla's AI prospects - even more so than Nvidia (NVDA), it seems. Wood recently trimmed her stake in Nvidia even further, to the tune of about $1 million, just before its blowout results - and has previously opined that Tesla, which commands a massive market cap of $730.15 billion, is the “biggest AI play out there.”

Tesla stock has had a stunning 2023 so far, with its shares rocketing 92.6% on a YTD basis - outpacing the broader ARKK's rise by a wide margin. Moreover, at 10.51%, the EV stock is the largest holding in Wood's flagship ARK Innovation ETF, with the stake carrying a total market value in excess of $768 million.

Tesla reported strong numbers in its latest quarterly results, as both revenue and earnings surpassed the estimates of the Street. Revenues for the second quarter came in at $24.93 billion, up 47% from the prior year and above the consensus estimate of $24.47 billion. Meanwhile, EPS rose by 20% from the previous year to $0.91, which surpassed expectations for $0.82. While revenues have been rising consistently over the past few quarters, EPS did fall in Q1, only to recover in Q2. Moreover, earnings have exceeded analyst expectations in each of the past five quarters.

Tesla also reported yearly growth of 30% and 62% in net cash provided by operating activities and free cash flow, respectively.

Operationally, the Elon Musk-led company has reported consistent growth in both production and deliveries for the past few quarters, hinting at strong demand for its vehicles - which has been further aided by price cuts.

Moreover, Tesla is not sitting idle in the dynamic AI space. It recently started production of the supercomputer Dojo to train driverless cars. Although Tesla uses a Nvidia GPU-based supercomputer now, Dojo will ultimately make use of chips designed by Tesla. Additionally, Tesla opened an AI research center in Austin, Texas, in February, and a new AI training facility in Fremont to augment its AI needs, along with hiring key execs from British AI company DeepMind earlier this year.

Overall, analysts have a consensus “Hold” rating on Tesla stock, with a mean target price of $242.42 - indicating upside potential of only about 2.3% from current levels. Out of 25 analysts covering the stock, 7 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 14 have a “Hold” rating, and 3 have a “Strong Sell” rating.

Roku (ROKU)

Founded in 2002, connected TV and streaming company Roku is, somewhat surprisingly, the second-largest holding in Cathie Wood's flagship fund. At 8.41% of the portfolio, ARKK's ROKU stake is worth about $615 million currently. The company's market cap pales in comparison to Tesla's, though, at $10.78 billion.

That said, Roku's share price appreciation certainly holds its own. Roku stock is up more than 90% on a YTD basis, not only outpacing ARKK and the Nasdaq, but nearly keeping up with Tesla's breakout performance.

In Q2, Roku's net revenues came in at $847.2 million, up 11% from the prior year and above the consensus estimate of $773.49 million. The company also narrowed its losses in the period to $0.76 per share from $0.82 in the prior year - easily besting the average forecast for a loss of $1.28 per share. Notably, losses have come in narrower than expectations in four out of the past five quarters.

Key metrics like platform revenue, active accounts, and streaming hours have also been rising in recent quarters, and Roku is expanding into direct to consumer advertising. However, a drop in average revenue per user (ARPU) remains a concern for the company.

Overall, analysts are cautiously optimistic about Roku stock. The consensus rating is “Moderate Buy,” but with a mean target price of $78.57 - which denotes upside potential of just 1.7% from current levels. Out of 24 analysts covering the stock, 10 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 10 have a “Hold” rating, 1 has a “Moderate Sell” rating, and 2 have a “Strong Sell” rating.

Exact Sciences (EXAS) 

We round out our list with molecular diagnostics company Exact Sciences. In keeping with Cathie's penchant for disruptive tech, Exact Sciences' flagship product, Cologuard, is the first and only FDA-approved DNA test that can detect colorectal cancer with 92% sensitivity and 90% specificity. 

The company currently has a market cap of $14.39 billion, and it's the ninth largest holding in Wood's flagship Innovation Fund, accounting for 3.98% and worth about $291 million.

On a YTD basis, Exact Sciences stock is up 62.5% - not quite on pace with TSLA and ROKU, but still easily outperforming ARKK and the wider Nasdaq Composite.

That said, EXAS has been on a downward spiral since its Q2 results on Aug. 1, despite exceeding expectations. Revenues for the quarter came in at $622.1 million, up 19% from the prior year and higher than the consensus estimate of $601.14 million. The company reported a loss per share of $0.45, markedly improved from a loss of $0.94 per share in the year-ago period. Over the past five quarters, EXAS has consistently narrowed its quarterly losses and surpassed analysts' bottom-line estimates.

Exact Sciences improved its cash generation capabilities in Q2, too. Unlike the year-ago period, the company reported positive net cash generation from operating activities of $100.4 million and free cash flow of $65.7 million.

Plus, the company raised its revenue guidance for FY23 to a range between $2.441-$2.466 billion, up from $2.380-$2.420 billion earlier, and hiked its adjusted EBITDA guidance to a range between $170-$180 million, compared to previous guidance of $100-$125 million.

All in all, analysts are upbeat about the company's prospects, as they have assigned a consensus “Strong Buy” rating on EXAS, with a mean target price of $110.07 - indicating upside potential of about 36% from current levels. Out of 16 analysts covering the stock, 12 have a “Strong Buy” rating and 4 have a “Hold” rating.

Final Takeaway

Cathie Wood has always been a believer in the fact that technology will disrupt the way we live for the better. That worldview can clearly be seen from the stocks in her flagship ARKK portfolio.

However, investing in Cathie Wood stocks is not for the faint of heart. Her preferred “disruptors” tend to be momentum-driven growth stocks, and tend to be unusually prone to volatility - which means the lows can be as dramatic as the highs. 

Nonetheless, I believe if investors are cautious with their allocations and mindful of maintaining a diverse portfolio overall - including dividend stocks, which can provide more reliable income - these three ARKK standouts are potentially worthy investment choices, with room to keep outperforming.

On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.