We recently compiled a list of the 10 Worst ARK Stocks To Buy According To Short Sellers. In this article, we are going to take a look at where Pacific Biosciences of California, Inc. (NASDAQ:PACB) stands against the other ARK stocks.
Investing comes in all sizes and flavors. For the risk averse investors that are looking for steady payouts or long term stability, value and dividend paying stocks are the way to go. For others, that are looking for serious returns, growth stocks are preferred at the cost of higher risk.
One hedge fund that takes a pure play aggressive growth stock investment approach is Cathie Wood’s ARK Investment. Ark is known for investing in stocks that it believes are or will prove to be disruptive. This strategy has seen the firm’s returns somewhat tailored to the broader economic and stock market environment. For instance, during the coronavirus pandemic when interest rates were at historic lows and internet stocks were booming, Ark Investment returned 20% in 2020. This led to Wood giving an interview with Bloomberg where she stressed that her firm kept a multi year investment horizon in mind when buying stocks. She also shared that Ark’s investment approach was thematic in nature, and as opposed to big tech stocks that had reaped most of their returns already, the hedge fund was focusing on sectors that it believed held the most promising futures. Some of the sectors that were on her mind were DNA companies, robotics, blockchain, energy storage, and everyone’s favorite, artificial intelligence.
While we’ll get to the other end of Wood’s returns being tailored to the economy or the broader stock market, artificial intelligence brings another controversial decision that her firm has made to our mind. This was when her firm decided to completely exit Wall Street’s favorite artificial intelligence stock, which ranks 14th on our list of Morgan Stanley’s Highest Conviction Stocks: Top 20 Stocks To Buy and is a multi trillion dollar firm known for its AI GPUs. What do Wood and this stock have in common? Well, her fund cut its stake in the firm by 63% in Q4 2022. Back then, the shares were trading at a post split valuation of $14.61 or at $146 pre split. By June 2024, the stock had soared to $1,131 (pre split) meaning that Ark had missed out on a whopping $854 million in gains.
Commenting on her decision later on, she shared that “we also redeployed a, a good chunk of” the proceeds from the stock sales, “certainly at the later stage of our selling” into the fast growth stock that’s ranked 6th in our list of the 10 Best Fast Growth Stocks To Buy Now. This stock “last year was actually up more” than the GPU company, said Wood, adding that if the GPU stock is “to continue working, we must see this pull through into more of the tech stack. Otherwise, we have some productivity tools and, uh, assistants, that are working at the periphery of organizations but are not getting at, uh, what Dario, the CEO of Anthropic, calls the central part of organizations.”
As to buying the shares again, Wood hasn’t ruled out buying it back again, she will only make such a decision “if there were a significant price correction around, around, let’s say around an inventory” correction. The investor then shared examples of historic inventory corrections especially when the cryptocurrency market underwent this correction and a glut led to the stock dropping by “two thirds in one quarter.”
Cycling back, the stock market’s recent performance has also made an impact on Wood’s portfolio. Looking at the performance of her top ten stock picks during Q4 2020 and analyzing their gains or losses by the close of Q1 2024, only four stocks remained in her portfolio. By the close of H1 2024, these stocks were all in the red. The worst performer amongst them had lost 86% since the start of 2021, while the others’ losses ranged between 73% to 39%. If you’re hoping that the stocks that were eliminated might have fared better, you’d be wrong. Not only are all six in the red, but several have lost more than 80% while one has been delisted from the NASDAQ exchange.
This performance would seem to imply that Wood has lost her stock picking mojo. However, this clearly isn’t the case. With the second quarter of 2024 hedge fund filings out, we can see which Cathie Wood stocks have done well and which have faltered. Analyzing the year to date performance of the top ten Cathie Wood stocks shows that six are in the green. This is noticeably better than how her fourth quarter of 2020 stocks have fared since then. These stocks’ performance ranges between 2.21% to 81.42%, with the top three performers up by 46.91%, 64.19%, and 81.42%, respectively. In the same order, these firms belong to software, financial markets, and data analysis industries and they rank 8th, 6th, and 9th in Cathie Wood’s Q2 2024 investment portfolio.
Before we head to our list of the worst Ark stocks to buy when considering short seller sentiment, it’s also important to understand the rationale behind the fund’s picking strategy. In its annual research report, the fund is still bullish on disruptive innovation. It believes that returns generated by firms that are part of this trend could exceed 40% on an annualized basis during the next seven years for a final market cap of $220 trillion. Ark also believes that AI training costs could drop by 75% per year by 2030, and the market for generalizable, or humanoid, robots could cross $24 trillion in annual revenue. Morgan Stanley seems to agree, and you can read more by checking out $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley.
Our Methodology
To make our list of the worst Ark stocks to buy according to short sellers, we ranked 120 stocks out of the 180 present in Ark Invest’s Q2 2024 SEC filings by the percentage of shares outstanding that were sold short and selected the stocks with the highest percentage.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A molecular biologist, carefully studying the reagents under a microscope.
Pacific Biosciences of California, Inc. (NASDAQ:PACB)
Short Interest as % of Shares Outstanding: 22%
Number of Hedge Fund Investors In Q2 2024: 18
Ark Invest’s Q2 2024 Stake: $45.5 million
Pacific Biosciences of California, Inc. (NASDAQ:PACB) is a medical devices company that makes and sells products such as gene sequencing systems, sequencing kits, and consumables. It has one of the most diversified portfolios when it comes to gene sequencing, as the firm sells both long and short sequencing products. However, the revolutionary nature of Pacific Biosciences of California, Inc. (NASDAQ:PACB)’s products means that they might not be easily popular among users. At the same time, the high costs of developing these machines, which cost more than $700,000 in several cases, mean that the firm has to ensure a stable revenue flow to keep investors happy. Pacific Biosciences of California, Inc. (NASDAQ:PACB)’s consumables business also tends to thrive when rates are low as it allows more biotechnology and high growth pharma firms to develop new products. The firm is yet to generate an operating profit and management expects the business to turn cash flow positive in 2026.
Pacific Biosciences of California, Inc. (NASDAQ:PACB)’s management shared key details for cost control, which should drive its hypothesis until sales pick up, during the Q2 2024 earnings call:
“As we discussed, we have made significant progress on improving the per unit production costs of both Revio instruments and Revio consumables, and expect both to end the year approximately 20% lower than when we launch the platform. We anticipate that these costs and operational improvements will continue beyond 2024 and are expected to drive quarterly growth margin expansion this year and going forward. However, our total growth margins in the second half may fluctuate quarter-to-quarter based off on product mix, customer project mix, and ASP. Moving to operating expenses, we remain diligent in our efforts to lower cash burn and spend profile and expect non-GAAP operating expenses to be around the lower end of our 300 million to 310 million range.”
Overall PACB ranks 1st on our list of the worst ARK stocks to buy according to short sellers. While we acknowledge the potential of PACB as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PACB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.