3 Cathie Wood stocks that could generate bigger gains than the market
This article is all about beating average stock returns, but let’s start by recognizing how good the “average” really is. For example, $ 10,000 invested in the S&P 500 30 years ago – 1991 – would be worth over $ 110,000 today. And if you’ve steadily increased your investment over those 30 years, there’s a good chance you’ll be nearing retirement loan status now.
Average is adequate when trying to achieve your financial goals. However, I think the average Joes and Janes can achieve even better than average returns by selectively picking great stocks and holding them for years, allowing the returns to compound.
Cathie Wood is the head of Ark Invest, a company managing several funds popular with investors. And Ark Invest’s holdings are full of great stock ideas that beat the market. Among these are a fintech company Square (NYSE: SQ), streaming TV platform Roku (NASDAQ: ROKU), and telehealth service company Teladoc Health (NYSE: TDOC).
A winning strategy to beat the market
But before you dive in, if you’ve ever wondered why stocks go up in the first place, you’re not alone. It may seem like I’m rolling the dice at random with Square, Roku, and Teladoc, but nothing could be further from the truth. It is important to remember that profits invariably boost stock performance for long-term investors. Therefore, here is a stock picking strategy that can beat the market: Find companies that can increase their profits for years to come.
I think Square, Roku, and Teladoc will grow their profits at a steady rate over the next few years. Now I do not wish to communicate that these companies are guaranteed to execute their business plans. After all, businesses can go off the rails. But these three companies are proving they have what it takes.
The ability to increase profits over time can be measured in several ways, but let’s just consider gross profit here. Over the past five years, Square and Roku have grown their gross profits considerably faster than Teladoc. But even though Teladoc lags behind this group, its gross profits still grew at a staggering 42% compound annual growth rate (CAGR), as the graph shows.
Growing profits from here
I think these three Cathie Wood stocks can beat the market in the long run as they will continue to grow their earnings at a faster rate than the market. There are several ways to do this. Let’s start by looking at the eighth largest holdings of the ETF Arche Innovation: Square.
Square can increase its profits by first increasing its revenue. According to Statista, the global digital payments market had more than $ 5.4 trillion in transaction volume in 2020, but the market is expected to reach $ 10.7 trillion by 2025, almost double in that five-year period. years. Therefore, this industry is still growing and Square’s revenue growth history suggests that it will continue to benefit from this industry. For example, Square’s second quarter 2021 Cash app ecosystem revenue was almost 13 times what it was just two years ago.
I think Square will continue to increase its gross margin as it will continue to increase its revenue. This is also the case with Ark Innovation ETF’s third largest holding, Roku. However, aside from revenue growth, I believe Roku will increase its gross margin as its profit margin continues to improve.
In Q2 2018, three years ago, Roku’s gross profit margin was 50%. It’s not terrible, but it was held back as the company’s low-margin hardware business accounted for 42% of total revenue. Fast forward to the present day, and its total gross profit margin is now 52%, as its higher margin software business now accounts for nearly 83% of total revenue. Not only does Roku have the opportunity to expand its margin further on this side of the business, it’s also a high-growth revenue stream as consumers and advertisers move faster and faster from the market. traditional television to connected television.
And that finally brings us to the second largest ETF Ark Innovation participation: Teladoc. In 2020, 79% of the company’s revenue came from subscription access fees; in contrast, only 19% came from visitation costs. I stress this because, when discussing the risks, Teladoc emphasizes that economies of scale are achieved with the growth of its subscription business and not necessarily the number of visits. With that in mind, take a look at what Teladoc has done over the past eight quarters with only subscription access fee revenue:
|Trimester||Q3 2019||Q4 2019||Q1 2020||Q2 2020||Q3 2020||Q4 2020||Q1 2021||Q2 2021|
|Turnover (in millions)||$ 119||$ 127||$ 137||$ 182||$ 227||$ 316||$ 388||$ 434|
These numbers are indicative of very lingering subscription activity and it is paying off with expanding margins, like Roku. Teladoc’s gross margin increased from 62% in the second quarter of last year to 68% in the second quarter of this year, thanks to this continued growth in subscription revenues.
However, like Square, I think Teladoc has a substantial opportunity to grow its revenue in addition to increasing its profit margins. To begin with, existing members are moving from a single Teladoc product to multiple products at a steady pace. And the company has ongoing cross-selling opportunities due to its acquisition of Livongo Health last year.
As a result of these and more, management estimates that 30-40% revenue growth per year through 2023 is achievable, which would more than double 2023 revenue from 2020 while simultaneously increasing. its gross margin. So put Teladoc as a strong candidate to beat the market during this period.
Last word of caution, gross margin is not everything. Between gross margin and net margin, management teams have a lot of decisions to make. And bad spending could derail an entire investment thesis. So there is more to explore with Square, Roku, and Teladoc than can be covered here. However, it is extremely difficult to beat the market unless your gross profit is increasing at a rate above the market.
Square, Roku and Teladoc are more and more in this key area, and that is why they are good candidates to beat the market.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.