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Actions of You’re here (NASDAQ: TSLA) climbed over 700% in 2020. However, some people are wondering if the stock is not due to a downturn. Indeed, those concerns took shape last week, as Tesla stock fell steadily below the $ 800 per share level on Friday.
For many of those who make a big profit from a position in stocks, a drop could result in modest profit taking or even a large-scale liquidation of their holdings. But for Cathie Wood, a big investor at ARK Invest, Tesla’s plunge was an opportunity to buy – and buy, she did, without hesitation.
Image source: Tesla.
Sell high, buy low
Wood has been a huge Tesla fan for a long time. Several of its active exchange-traded funds hold substantial equity stakes. More precisely, the ETF ARK Innovation (NYSEMKT: ARKK) and the Next Generation ARK 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 might have concluded by simply looking at this one week of activity that Wood could lose his confidence in the stock.
But Wood reversed the trend on Jan.29, taking advantage of the drop in the stock price to buy back some of the stocks she had sold the week before. 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 similar sized buy commensurate with the smaller size of the fund, taking in almost 23,500 shares.
How much money did ARK Invest earn?
With active ETFs, we don’t get real-time information about the buys and sells made by the fund managers. However, the funds are required to give their positions every day, and ARK Invest reveals the exact number of shares involved in each buy or sell.
However, you can estimate the amount of benefit to the fund that Wood’s transactions produced. Tesla traded at $ 845 on January 19 and $ 850 on January 20, the days ETFs sold Tesla shares. With Tesla closing on January 29 at $ 794, the fund could have saved $ 51 per share out of the 85,500 shares purchased by ARK Innovation. ARK Next Generation Internet only sold 10,500 shares last week, but it could have saved $ 56 per share on the buyback. Do the math and that represents $ 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 advisers recommend people do with their overall investment portfolios. Essentially, Wood did a short-term rebalancing. She sold Tesla shares when the percentage of the ETF portfolio became higher than she wanted. But when that percentage subsequently got too low, funds bought stocks to rebalance.
You can see the same types of gains with a broader rebalancing of your positions in stocks, bonds, and cash. In years when stocks are rising, selling a small portion at high prices to switch to lower-priced assets reduces your level of risk and earns you some profit. If the stock market goes down the following year, rebalancing allows you to buy stocks on the cheap.
What’s next for Tesla?
Tesla inspires a lot of controversy, and there is no end in sight for it. 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 power of Tesla’s business, as well as the high 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 performed well for her. ARK Innovator and ARK Next Generation Internet have received five stars from Morningstar, and the list of other titles looks like a who’s-who among the emerging giants in their respective fields.
Tesla shares have risen so much that shareholders should expect pullbacks, and they could be much larger than what we saw last week. Yet for long-term investors who see value in CEO Elon Musk’s vision and the technology Tesla has produced, these short-term swings are primarily an opportunity to acquire stocks a little cheaper.
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