ARKG: A Genomic Revolution Fund For Long Term Growth Seeking Investors (BATS:ARKG)

mRNA Technology - Messenger RNA - Two Strands of mRNA on Abstract Technology Background

ArtemisDiana

~ by Snehasish Chaudhuri, MBA (Finance)

Last time I covered ARK Genomic Revolution ETF (BATS:ARKG) on May 11th, I was pessimistic about this stock, and didn’t expect any significant price rise. In the absence of any significant dividend yield and positive price growth in the short and medium term, I preferred to stay away from investing in this fund. However, I promised to reassess this fund, in case of a price drop of further 20 percent. The stock was then trading around $30, and is still trading around that price. ARKG didn’t drop by more than 20 percent in between. However, it crossed the $40 mark and then again dropped to the current price of $32.24. A series of interviews by ARK Invest CEO Cathie Wood, however, made me take another look at this stock. Her views on possible deflation and recession are to be taken seriously.

Cathie Wood’s View of the Current Economic Situation and the Market

Cathie Wood has been vocal about a possible miscalculation on inflation on the part of the Federal Reserve and has been critical about increasing rates at such a steep pace. According to her,

The Fed is basing monetary policy decisions on lagging indicators: employment and core inflation. Leading inflation indicators like gold and copper are flagging the risk of deflation. Even the oil price has dropped more than 35% from its peak, erasing most of the gain this year.

In an interview with Bloomberg TV, she said,

We believe we’re in a recession. Two consecutive quarters of real GDP declines is the beginning of that definition. Three consecutive months of declines in leading indicators, which we have now, would suggest the same.

Like many other renowned investors, Cathay Wood also advocated that deflation is the bigger risk over the long run. She used the gold price as evidence to support her argument. Gold is traditionally seen as the safest option during the times of inflation, but this has not been the case in 2022. She mentioned that “Gold prices peaked in August of 2020 two years ago, and we’ve been in a trading range to be sure we’re at the low end of that trading range.” She also has been very critical about the environmental, social, and governance (ESG) incentive scheme, which according to her is directing capital in wrong ventures. In her words, “There was a lot of slapping lipstick on a pig and basically any portfolio being promoted as ESG… So, I think the misallocation of capital was quite extreme.”

ARKG Makes Wise and Effective Reshuffling of its Portfolio

ARK Genomic Revolution ETF primarily invests in companies that are engaged in the research of genomic sequencing, analysis, synthesis, or instrumentation. ARKG has invested almost two-third of its assets in companies dealing with molecular diagnostics (17 percent), bioinformatics (16.5 percent), beyond DNA (19 percent) and targeted therapeutics (13.5 percent). Almost 85 percent of its investments are in small and medium sized biotech firms, including few alpha generating stocks. An alpha generator generates returns higher than a pre-selected benchmark without any substantial additional risk.

ARKG is an interesting fund to track, due to its wise portfolio reshuffling. I considered ARKG’s portfolio in three different points – at the end of June, 2021, at the end of September, 2022, and somewhere in the middle of these two periods, that is February 2022. As of June 2021, the fund had significant investments (more than 3 percent of the entire fund) in 10 stocks. I found that every time, they removed two stocks from their list of significant investments, and included 4 new stocks. In the next list (February 2022), while Regeneron Pharmaceuticals, Inc. (REGN) and Accolade, Inc. (ACCD) were removed, the fund included Intellia Therapeutics, Inc. (NTLA), Beam Therapeutics Inc. (BEAM), Incyte Corporation (INCY), and CRISPR Therapeutics AG (CRSP).

During the past few months, three out of these four stocks were the standout performers within the biotechnology sector. During the past three months, BEAM grew by 9.5 percent, and NTLA by 1.5 percent. CRSP on the other hand grew by 5 percent during the past 6 months. NTLA rose in sympathy with Alnylam Pharmaceuticals (ALNY), whose amyloid transthyretin (ATTR) amyloidosis therapy successfully met its prime goal in a late-stage trial. NTLA also has an ATTR candidate, thus market sentiments worked in its favor. As I mentioned earlier, the portfolio reshuffling is made wisely, and in most cases their bets worked. And this is quite important, as these significant investments account for almost 70 percent of the entire fund.

This current portfolio reduced investments in Pacific Biosciences of California, Inc. (PACB) and Vertex Pharmaceuticals Incorporated (VRTX), and included Ginkgo Bioworks Holdings, Inc. (DNA), SDGR Schrödinger, Inc. (SDGR), Verve Therapeutics, Inc. (VERV), and ACCD. DNA develops platforms for cell programming. SDGR provides physics-based software platforms that enable discovery of novel molecules for drug development and materials applications. VERV is a genetic medicines company, engaged in developing gene editing medicines for patients to treat cardiovascular diseases. ACCD develops technology-enabled solutions that are helpful in understanding, navigating, and utilizing the healthcare system and their workplace benefits. Going forward, I am hopeful that these four stocks will also outperform the return of the biotechnology sector.

Investment Thesis

ARKG is only for long-term growth seeking investors. From the very beginning, I am using three basic criteria for backing this fund – a) future growth prospects of Genomics Revolution b) efficiency of portfolio reshuffling and c) current price multiples. I discussed the growth prospects of genomic revolution in detail in one of my earlier coverage during February 2022. However, in order to benefit from such growth prospects, investors have to be patient and look for a much longer time horizon than other healthcare stocks.

The fund does some effective reshuffling from time to time, which backs some alpha-generating low-priced stocks, and sells out one or two large-cap biotech stocks in order to finance these acquisitions. The fund also makes sure that the stocks which it is betting upon stays in their portfolio for a longer period of time. I am impressed by these particular qualities of the ARK Genomic Revolution ETF. Forecasting an alpha generating stock and backing it for a very long period of time is an extremely risky decision, which ARKG has been able to achieve successfully over the years.

However, that doesn’t mean I am willing to accumulate this fund on regular intervals. As the price multiples keep on changing from time to time, my interest in accumulating this stock also keeps changing. A Price/earnings (P/E) of 25, Price/Cash Flow (P/E) of 15 and Price/Sales (P/S) of almost 1 suggests the fund is far from being considered as undervalued. This is quite unusual too, considering the fact that ARKG’s market price has dipped by more than 65 percent during the past 1 year. Thus, I’d practice restraint, and as usual I’d prefer to buy further units of the ARK Genomic Revolution ETF only in case the price moves down substantially, at least by another 20 percent.

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