For all the attention given to the argument that the stock market is in a bubble, it is important to point out that not everyone shares that view.
Few fund managers have been more successful than Cathie Wood, the chief executive of ARK Invest and fund manager of the ARK Innovation ETF ARKK, +1.06% and ARK Genomic Revolution ETF ARKG, -0.20%, which according to FactSet have drawn in more inflows than any other actively managed stock exchange-traded fund over the last 12 months. In a monthly webinar, Wood made the argument against stocks being in a bubble.
Since 2018, there have been outflows of roughly $300 billion from equities, excluding share repurchases by companies. But there have been inflows of $1 trillion into bonds, she said. “If there is a bubble anywhere, it is not in the equity market, it is in the fixed-income market,” she said.
Private equity is feeding this bubble, she said. “It’s amazing to me to watch private equity, with mature [companies], will continue to leverage them up so they can enjoy the private equity distribution,” she said. Private-equity owners are sustaining high-multiple cash flows by not investing in the future. “That’s become problematic for these companies, and their high cash-flow margins will disappear over time.”
The phenomenon of call-buying “moonshots” that videogames retailer GameStop GME, -16.15% and AMC Entertainment AMC, -11.00% equities have enjoyed also has fed into the bond bubble, she said. AMC bonds trading at 5 cents on the dollar have shot up to 80 cents because the movie-theater chain was able to issue equity. “Who’s going to be left holding the bag if AMC goes bankrupt? I don’t think one equity offering is going to change their circumstances,” she said.
She also took a swipe at passive investing. “This move toward passive investing we’ve seen over the last 20 years…that now is a setup for disappointing returns,” Wood said. While acknowledging passive funds were inexpensive, she said they were “cheap for a reason,” a phrase often associated with arguments against value stocks. At least have a hedge by investing in innovation, Wood said.
In the equities market, there is a bifurcation between those companies on the leading edge of innovation and investing, versus those companies that haven’t. She gave electric-vehicle maker Tesla TSLA, -1.62%, payment-services firm Square SQ, -0.71%, and streaming digital player maker Roku ROKU, +7.52% as examples of evolving platform companies that will be winner-take-most. “We think these companies will grow into their valuations, much like Amazon has been doing.”
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