Shares of Tesla (NASDAQ: TSLA) climbed more than 700% in 2020. However, some people wonder if the stock isn’t ready for a downturn. Indeed, those concerns took shape last week when Tesla’s stock fell steadily to drop below $ 800 a share on Friday.
For many who make a big profit on a stock position, a decline can lead to a modest profit taking or even a complete liquidation of their holdings. But for bait investor Cathie Wood at ARK Invest, the dip in Tesla was an opportunity to buy – and she did it without hesitation.
Image Source: Tesla.
Sell high, buy low
Wood has been a big fan of Tesla for a long time. Several of its active exchange-traded funds have significant shares in the stock. In particular the ARK Innovation ETF (NYSEMKT: ARKK) and the ARK Next Generation Internet (NEW: ARKW) both have invested nearly 10% of their assets in the electric automaker.
Last week, the two ARK ETFs reduced their positions in Tesla. Some may have concluded from watching that one week of activity that Wood may be losing her confidence in the stock.
But Wood reversed course on January 29 and took advantage of the share price drop to buy back some of the shares she had sold the week before. ARK Innovation bought more than 85,500 Tesla shares on Friday, representing approximately 0.3% of the fund’s total assets. ARK Next Generation Internet made a purchase of a similar size in relation to the smaller size of the fund, with nearly 23,500 shares.
How much money has ARK Invest made?
With active ETFs, we don’t get real-time information about the purchases and sales that fund managers make. However, the funds are required to declare their positions every day and ARK Invest will disclose the exact number of shares involved in each purchase or sale.
However, you can estimate the amount of benefit to the fund that Wood’s trades generated. Tesla traded for $ 845 on January 19 and $ 850 on January 20, the days the ETFs sold Tesla stock. With Tesla closing January 29 at $ 794, the fund could have saved $ 51 per share on the 85,500 shares ARK Innovation bought. ARK Next Generation Internet sold only 10,500 shares last week, but it could have saved $ 56 a share on the rebuy. Do the math and that equates to $ 4.36 million for ARK Innovation and $ 588,000 for ARK Next Generation Internet.
The benefits of rebalancing
Interestingly, what Wood did is very similar to what most financial advisors recommend people do with their general investment portfolios. Essentially, Wood was doing a short-term recovery. She sold Tesla stock when the percentage of the ETF portfolio got higher than she wanted. But when that percentage subsequently fell too low, the funds bought stocks to rebalance.
You can see the same types of gains with a broader realignment of your stock, bond and cash positions. In years when stocks are rising, selling a small portion at high prices to switch to lower-price assets lowers your level of risk and makes you profit. If the stock market falls in the next year, rebalancing will allow you to buy stocks cheaply.
What’s next for Tesla?
Tesla is generating a lot of controversy, and there is no end in sight. Some still argue that Tesla’s profits are artificially inflated by regulatory credits, masking his company’s inherent weakness. Others point to the immense optionality of Tesla’s business, as well as the strong demand for its vehicles.
As for Wood, her prowess is largely due to her investments in Tesla, but the automaker isn’t the only stock that has done well for her. Both ARK Innovator and ARK Next Generation Internet have earned five-star ratings from Morningstar, and the list of other holdings looks like a who’s who among the emerging giants of their respective fields.
Tesla shares have rallied so sharply that shareholders should expect a downturn, and they could be much bigger than what we saw last week. But for long-term investors who see value in CEO Elon Musk’s vision and the technology that Tesla has spawned, those short-term fluctuations are primarily an opportunity to pick up slightly cheaper stocks.