Actions of Tesla (NASDAQ: TSLA) it rose more than 700% in 2020. However, some people are wondering if the stock is not about to fall. In fact, those concerns took shape last week, with Tesla’s shares falling steadily, falling below the $ 800-a-share level on Friday.
For many who make a big profit on a stock position, a decline can lead to modest profit realization or even a large-scale liquidation of their holdings. But for big investor Cathie Wood of ARK Invest, the Tesla dip was an opportunity to buy – and she bought it 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 have substantial equity interests. 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 company.
Last week, the two ARK ETFs reduced their positions at Tesla. Some may have concluded, just by looking at that single week of activity, that Wood may be losing confidence in his actions.
But Wood reversed the course on January 29, taking advantage of the drop in stock prices to repurchase some of the shares he had sold the previous week. ARK Innovation bought more than 85,500 Tesla shares on Friday, which represents about 0.3% of the fund’s total assets. ARK Next Generation Internet made a similarly sized purchase in proportion to the smaller size of the fund, acquiring almost 23,500 shares.
How much money did ARK Invest earn?
With active ETFs, we don’t get real-time information about the purchases and sales that fund managers make. However, funds are required to provide their positions each day, and ARK Invest reveals the exact number of shares involved in each purchase or sale.
However, you can estimate the value of the benefit to the fund that Wood’s transactions produced. Tesla traded at $ 845 on January 19 and $ 850 on January 20, days when ETFs sold Tesla shares. With Tesla closing on January 29 at $ 794, the fund could have saved $ 51 per share on the 85,500 shares purchased by ARK Innovation. ARK Next Generation Internet sold just 10,500 shares last week, but it could have saved $ 56 per share in the repurchase. Do the math and that will add 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 advisers recommend people to do with their investment portfolios in general. 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 became very low, the funds bought shares to return to balance.
You can see the same types of gains with a broader rebalancing of your stock, bond and cash positions. In the years when stocks rise, selling a small portion at high prices to switch to lower-priced assets reduces your level of risk and earns some profits. If the stock market falls in a subsequent year, rebalancing will make you buy stocks at a low cost.
What’s next for Tesla?
Tesla inspires a lot of controversy and there is no end in sight for that. Some even argue that Tesla’s profits are artificially inflated by regulatory credits, masking the weakness inherent 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, his skill is largely due to his investments in Tesla, but the automaker is not the only stock that has performed well for her. Both ARK Innovator and ARK Next Generation Internet obtained five star ratings from Morningstar, and the list of other entries appears to be a who’s who among the rising giants in their respective fields.
Tesla’s shares have soared that shareholders need to expect retracements, and they may be much larger than what we saw last week. Still, for long-term investors who see value in CEO Elon Musk’s view and the technology that Tesla has produced, these short-term fluctuations are primarily an opportunity to buy shares a little cheaper.