Innovation stocks: boom, bull or bust
Hello, and welcome to the Smart Money Dumb Money Show. It’s July the eighth. And I’m your host, Keith Richards, President and Chief Portfolio Manager of ValueTrend Wealth Management. And today we’re going to take a look at innovation stocks. There’s been an awful lot of innovation going on by companies really over the past couple of years in particular, because of COVID.
COVID pushed people to work at home to find new sources of entertainment when entire states and provinces have been locked down. Innovation has pushed people towards technologies that will allow them to still see the doctor all these kinds of things. So there’s a lot of innovation. In fact, you know, I’m speaking to you right now through zoom, I’m using zoom to record my videos for ValueTrend. And this is one of those technologies that two, three years ago, who ever heard of zoom, but now it’s a software package and a communication package that is used by many, many individuals, and businesses across the world.
So these are the innovative companies that I’m talking about. One of the significant developments that’s happened has been a formation of an ETF called the ARK Innovation fund. And we’re going to take a look at that in a minute as we view, just whether some of these innovative stocks and the sector, if you want to call it, that is possibly becoming a little overbought and possibly becoming a little bubbly. So let’s, let’s get right to a PowerPoint presentation that I put together. I’m starting to use the PowerPoints with these videos. And the reason is because I can flow the charts far easier than when I’m flipping between various online programs. So let’s get to the PowerPoint where I’ve posted the charts that I want to address today, and we’ll go right to, or from the beginning, right?
We are going to talk about innovation stocks. And this is the ARK ETF that I was, I was noting. And what I want you to take a note of here is the pattern where this ETF there’s been lots of innovation over the past number of years, but the stocks really were not doing much between the year 2019 and 2020 along came the COVID crash and boom, they erupted into a massive increased level of returns. I mean, literally the ARK fund went from 30 to 160 don’t. You wish you owned that ETF for that period of time, but of late the stock is rounded over. I should say the ETF is rounded over from the level of about 116. It’s currently trading about 125. This is as of yesterday’s pricing July the seventh, you’re probably watching this about a week after I’ve recorded this, but the chart is nevertheless, going to be relatively similar when you’re looking at it as to when I’m recording this.
Now, what I want you to notice though, is the pattern. So it rose strongly almost parabolically you can say, and then declined and is in a sequence where it declined at lower high or high, lower, low. Now the lower, low, and a rally that seems to be possibly have taken out the last high. So does that mean that this downside is over for this group of stocks that represent the innovative ETF? Well, let’s take a look at something.
Now this is a cycle graph of how many stock cycles market cycles work. It’s a theoretical drawing. It’s not to be considered a guideline as to how you should trade stocks or how you should look at the market, but it gives you a general idea on how stocks that go through a boom and bust cycle work. So, what you’re seeing here is during the early stage of any stocks cycle, especially a stock that’s going to move into a very parabolic greed orientated cycle that moves up strongly is that smart money is buying the sector or the stock very early and followed by the very, very smartest money. The most successful hedge fund managers, the big industries like Warren Buffet and whatnot are followed by a number of the institutional investors and the institutional people are generally considered in that smart money group.
Now you could argue not all portfolio managers and institutional investors are necessarily the smarter guys or gals in the room, but on average, they’re a little smarter than the retail investment crowd. We’re looking at average it’s here. So the first segments of a rally in any of these types of stocks is generally during when these prices, the prices of these stocks are low when they’re bought by the smart money, but then the retail investment crowd catches onto the trade.
And there is a, a bit of media attention, as you can see here. And that’s what we saw as you know, after the COVID crash, that a lot of these stocks began getting a lot of attention and the public, as you can see here, steps in retail investors, and then it finally becomes the new paradigm. This is the way it’s going to be from now on. Everybody’s going to be using zoom to communicate no more in-person meetings. Everybody’s going to be driving electric vehicle. Everybody’s going to be, you know, smoking weed or whatever the innovation is. It’s the new paradigm. And that generally represents the peak of the cycle.
Now what I’m not implying is that, for example, electric vehicles will not be the future. I’m not implying that zoom or any of these communication products will not be used far more than they have been say from 2019 and before what I am saying is that the public bids, the stocks, this sector, whatever is up to an almost delusional level of participation and profits.
So that even though it may be a reality that we will all be driving electric cars in 10 or 20 years, it’s priced like we’re doing it tomorrow. So that is what I mean by the new paradigm on this chart. You’re getting to this point where it falls the public denies, they think they see a rally. They think it’s an opportunity to buy into the sector because maybe they missed out when it was down here and then it becomes what we call a bull trap. So it rallies and falls. Now, again, we don’t necessarily know which of these innovative stocks are going to be going through this cycle, but you can sort of see some similarities.
I want you to keep this drawing in mind as we look at the next few charts. So first, let’s look at the top holdings of the ARK ETF, the innovative ETF. So Tesla, the car maker, Roku, which is a platform where you can watch Netflix and all these streaming entertainment vehicles, Teladoc, which is a company that actually allows you to in the US, deal with a physician, right over something like zoom, you know, right over the internet and not have to go into an office, which is very convenient for a lot, a lot of people. Zoom, which is you know, on the list. I’m on zoom right now, a lot of people are using zoom. Down, down the road, there’s, you know another big one is Twillo. They’re a communication software program. Stuff like that.
And then of course, Shopify, and it’s not on the list. But Amazon would be in that group where people shop at home. Okay. Fairly innovative. So let’s take a look at Tesla. Do you recognize a similar pattern? If we go back to this pattern, do you recognize that on Tesla where it was going nowhere and then boom up. Okay. So the early birds got in on Tesla during ’18 ’19 or whatnot, and then the stock just went to the moon. Okay. Now we have a retreat and possibly a rally. And whether it’s going to end up looking like this or not is the question. But I would suggest, and this is my favorite whipping boy, I have talked about, Tesla in fact, I called this top on Tesla back at the beginning of the year, go look at my blogs, please and you will see that in January, I suggested that Tesla was popping. Whatever the case, my feeling is that Tesla is valuated to a point where it’s got a market cap that is larger than all the other major automakers combined. So effectively what Tesla looks like is the company. That’s going to be the only one selling cars at this point. And that’s obviously not the case, the money, the resources, the innovation behind many of these other car companies and the variety of type of cars that these people sell. I’m sure Tesla could duplicate some of them, but to think that they’re going to be the biggest and only especially almost the only game in town, which is the way it’s price right now is rather ridiculous. So, my thoughts are that this particular stock may end up looking a little bit like that boom, and bull busts cycled. I think that there’s maybe more downside ahead of us for Tesla.
Roku. So Roku’s the streaming platform company. There is your classic top and followed by the rally that took out the last high, just like on the drawing. Okay. So again probably things streaming networks and stuff are going to continue being strong. That’s not the argument. It’s whether the valuation is on this stock, that supplies, the network for these kinds of services are, is going to be continued to be valued the way it is.
Zoom. As I said, I’m on zoom right now. So, we’re getting that possible rally after this look what zoom did after the crash earlier in 2020, it zoomed. And now we’re in sort of a bit of a pullback cycle. Did zoom get too expensive? That’s a question I’m just asking.
Teladoc, amazing company, amazing platform, I think for that is innovative and a fantastic service, but you can see that the stock is rounding over just based on basic technical analysis shows us that there was a bit of a rally, a bit of a base, a final spike, and it looks like it’s kind of broken that support level.
So again, is this one of those stocks that’s in the ARK ETF that is going to be subject to a possible boom, bull and bust cycle? Possibly.
Twillo. Again, that’s kind of a cloud company, I believe. Great thing about being a technical analyst. You don’t really have to know exactly what the company does. You just need to know what the company’s price is doing. So this is probably a better looking chart than some of the other ones that we’ve seen, but we have seen a break of the, the rally and then a bit of a downtrend followed by a new, higher high but a lower low there. So whether it’s going to end up looking again, go all the way back to our chart when it was going to end up looking like this or not is the question. But all of these stocks have the possibility of doing so because they have followed that high in the sky belief that things have not only changed for the, for the permanent situation, but they’ve changed to a point where the profitability of these companies will be astronomical for years.
Some of them will be the next Microsoft and whatnot, but some of them won’t, if you have to keep the eye on the prize to determine which ones of these are head fakes and which ones are the real McCoy Shopify is.
I wanted to show you a couple of positions now that have constructive looking charts. They’re not looking like they’re forming that bust part of the cycle, which the first number of charts I had just shown you do seem to be forming. Shopify is not one of these companies. As you can see it when it consolidated after a pretty strong move after the 2020 crash, but it really went sideways. And it just looks like it’s on the verge of breaking out of that sideways pattern right here. So that’s very constructive and Amazon, which is not in the ARK technology or innovation ETF you can see that Amazon is legitimately breaking out on the very long-term base.
So, these companies, especially, especially Amazon, I would think are pretty legitimate vehicles that really do have a story that are likely to carry on for many, many years. They got overvalued. They worked out that excess through a sideways consolidation paradigm, which is actually very, very healthy.
I worry more about the Teslas and the zooms and whatnot. I worry more about them and their pattern than I do some of the majors like Amazon, as you can see here, and even, even Shopify, which is nowhere near as big as Amazon, but it’s in a similar industry. So you have to, if you’re looking at innovative stocks, I guess the lesson that we are sharing here, what we’re looking at today is that some of the stocks maybe massively overpriced and are following a pattern that has a tradition of being a bust cycle. We can’t call out which ones are going to be the bust cycle stocks that we’ve just looked at. We may have some clues, but we don’t know the absolutes, but what I always suggest to people is this. If the chart is showing any signs of a possible bust cycle, at the very least, if you own the stock, keep an eye on it and be prepared to sell because it could get ugly. Thanks for watching you have a great day.
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