Shares of Tesla (NASDAQ:TSLA) climbed more than 700% in 2020. However, that has some people wondering whether the stock isn’t due for a downturn. Indeed, those concerns took shape last week, as Tesla’s stock fell steadily to drop below the $800 per share level by Friday.
For many who have a big profit on a stock position, a decline might prompt some modest profit-taking or even a full-scale liquidation of their holdings. But for ace investor Cathie Wood at ARK Invest, the dip in Tesla was an opportunity to buy — and buy she did, without hesitation.
Image source: Tesla.
Sell high, buy low
Wood has been a big fan of Tesla for a long time. Several of her active exchange-traded funds have substantial holdings in the stock. Specifically, the ARK Innovation ETF (NYSEMKT:ARKK) and the ARK Next Generation Internet (NYSEMKT:ARKW) both have almost 10% of their assets invested in the electric automaker.
Last week, the two ARK ETFs trimmed their positions in Tesla. Some might have concluded from just watching that single week of activity that Wood might be losing her confidence in the stock.
But Wood reversed course on Jan. 29, taking advantage of the share price decline to buy back some of the shares she had sold the previous week. ARK Innovation bought more than 85,500 shares of Tesla on Friday, representing about 0.3% of the fund’s total assets. ARK Next Generation Internet made a similarly sized buy in proportion to the smaller size of the fund, picking up almost 23,500 shares.
How much money did ARK Invest make?
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 give their positions each 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 Wood’s transactions produced. Tesla traded at $845 on Jan. 19 and $850 on Jan. 20, the days on which the ETFs sold Tesla shares. With Tesla closing Jan. 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’ve saved $56 per share on the rebuy. Do the math and that adds up 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 that people do with their overall investing portfolios. Essentially, Wood did a short-term rebalance. She sold Tesla shares when the percentage of the ETF portfolio got higher than she wanted. But when that percentage subsequently got too low, the funds bought shares to get back into balance.
You can see the same kinds of gains with broader rebalancing of your stock, bond, and cash positions. In years when stocks rise, selling a small portion at high prices to shift into lower-price assets reduces your risk level and cashes in on some profits. If the stock market goes down in a subsequent year, then rebalancing has you buy shares on the cheap.
What’s next for Tesla?
Tesla inspires a lot of controversy, and there’s no end in sight for that. Some still argue that Tesla’s profits are artificially inflated by regulatory credits, masking the inherent weakness in its business. Others point to the immense optionality in Tesla’s business, as well as the strong demand for its vehicles.
As for Wood, her prowess is in large part due to her investments in Tesla, but the automaker isn’t the only stock that’s performed 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 rising giants of their respective fields.
Tesla shares have risen so much that shareholders need to expect pullbacks, and they could be much larger than what we saw last week. Yet for long-term investors who see value in the vision of CEO Elon Musk and the technology that Tesla has produced, those short-term fluctuations are primarily an opportunity to pick up shares slightly more cheaply.