Shares of Tesla (NASDAQ: TSLA) increased by more than 700% in 2020. However, some people are asking if the stock is not due to a downturn. Indeed, these concerns took shape last week as Tesla’s share gradually fell below $ 800 a share by Friday.
For many who have a large profit on a stock position, a decline can cause a modest profit taking or even a full-scale liquidation of their shares. But for ace investor Cathie Wood at ARK Invest, diving into Tesla was an opportunity to buy – and buy it without hesitation.
Image source: Tesla.
Sell high, buy low
Wood has long been a big fan of Tesla. Several of her active exchange-traded funds have a large stake in the stock. Specifically, the ARK Innovation ETF (NYSEMKT: ARKK) and the ARK Next Generation Internet (NEW: ARKW) both invested almost 10% of their assets in the electric car manufacturer.
Last week, the two ARK ETFs cut their positions in Tesla. Some might have come to the conclusion just looking at this week’s activity that Wood might be losing her confidence in the stock.
But Wood reversed on Jan. 29, taking advantage of the drop in the share price to buy back some of the shares it sold the previous week. ARK Innovation bought more than 85,500 shares in Tesla on Friday, representing about 0.3% of the fund’s total assets. ARK Next Generation Internet made a similar purchase in relation to the smaller size of the fund and picked up nearly 23,500 shares.
How much did ARK Invest earn?
With active ETFs, we do not get real-time information about the purchases and sales that fund managers make. However, the funds are expected to give their positions every day, and ARK Invest reveals the exact number of shares involved in each purchase or sale.
However, you can estimate the amount of the benefit to the fund that generated Wood’s transactions. Tesla traded at $ 845 on January 19 and $ 850 on January 20, the days on which the ETFs sold Tesla shares. With the closing of Tesla on January 29 at $ 794, the fund could have saved $ 51 per share on the 85,500 shares that ARK Innovation bought. ARK Next Generation Internet sold only 10,500 shares last week, but it could have saved $ 56 per share on the buyout. Do the math and it costs $ 4.36 million for ARK Innovation and $ 588,000 for ARK Next Generation Internet.
The benefits of rebalancing
What Wood has done is very similar to what most financial advisors recommend people do in their overall investment portfolios. In essence, Wood did a short-term rebalancing. She sold Tesla shares when the percentage of the ETF portfolio became higher than she wanted. But when the percentage then became too low, the funds bought shares to be in balance again.
You can see the same gains with a broader rebalancing of your stocks, bonds and cash positions. In years when stocks rise, your risk level decreases a small portion at high prices to switch to lower price assets and earn your profit. If the stock market declines in a subsequent year, then you need to buy cheap stocks again if you rebalance.
What’s next for Tesla?
Tesla is causing a lot of controversy, and there is no end in sight. Some still argue that Tesla’s profits are artificially inflated by regulatory credits, hiding the inherent weakness in its business. Others point to the enormous optionality in Tesla’s business, as well as the strong demand for its vehicles.
As for Wood, her skill is largely due to her investments in Tesla, but the carmaker is not the only stock performing well for her. Both ARK Innovator and ARK Next Generation Internet have earned Morningstar five-star ratings, and the list of other businesses looks like a who-who-in-the-world among emerging giants from their respective fields.
Tesla shares have risen so much that shareholders should expect withdrawals, and that could be much bigger than what we saw last week. For long-term investors who see value in the vision of CEO Elon Musk and the technology that Tesla has produced, the short-term fluctuations are primarily an opportunity to pick up stocks slightly cheaper.