Stocks—are they right for your portfolio?

Cathie Wood is one of the world’s most popular and influential investors. Her firm, ARK Invest, is one of the most successful investment companies in the green-tech space. Two popular ARK Invest ETFs—Innovation Fund and Autonomous Technology & Robotics—have posted especially strong returns in 2021. These ARK ETFs focus on disruptive innovations, mostly in the biotechnology, robotics, e-commerce, and software fields. Among their most important performers are two positions that we have identified as Pure Climate Stocks.

But what is a Pure Climate Stock? And how firmly does ARK Invest believe in the future of truly climate-friendly businesses?

Pure Climate Stocks for pure climate plays

Pure Climate Stocks represent companies that make 100% of their revenues from products and services that represent crucial solutions for preventing climate change. Our methodology screens tens of thousands of stocks across multiple sectors and exchanges to identify pure climate plays.

The Pure Climate Stocks in ARK ETFs are Tesla and Niu Technologies. These companies operate in the field of electric vehicles (EVs)—Tesla with its line of electric cars, Niu with electric scooters. Electric mobility is absolutely essential if we are to achieve global net zero emissions by 2050. Although their batteries are charged by sources that may still draw on fossil fuels, EVs represent an enormous step toward eliminating CO2 emissions from petrol consumption. In most countries, EVs already emit less CO2 than conventional vehicles. As electric grids convey increasing shares of electricity produced by renewable means, net carbon emissions from EVs will continue to drop. With that in mind, let’s take a closer look at Tesla and Niu.

A quick look at two electric-mobility leaders in ARK Invest ETFs

1. Established in 2003, Tesla is the world’s leading manufacturer of electric vehicles, and will soon offer a range of trucks. Along with electric vehicles, Tesla develops solar energy solutions and the energy-storage technologies that make renewable sources of energy commercially viable.Tesla has grown to become the world’s largest automobile manufacturer by market capitalization. Its $710 billion in market cap dwarfs second-place Toyota’s $252 billion. This has led some to consider it overvalued, especially considering its revenue history. For years, Tesla relied on carbon credits to support its revenue from vehicle sales and related offerings. It posted its first profit from sales alone in Q2 2021.
2. Niu Technologies is a self-described micro mobility solutions company based in Changzhou, China. Its line of electric scooters claims a global ridership of nearly half a million. Niu also delivers fleet solutions including a management platform that integrates each fleet’s scooters through IoT hardware. Most of its sales are within the Chinese market, but Niu has expanded its retail presence to five continents. It has established an especially significant network of dealerships in Europe.

A quick glance at some broad financial figures for each company demonstrates why they have caught investors’ attention.

What does ARK Invest think?

Uniquely among major funds, ARK Invest publicizes its trades each day. This makes it a valuable and somewhat transparent bellwether for the stocks in which it takes major positions. Cathie Wood is famously an early Tesla supporter, and ARK Invest has established a significant position in Niu.

Wood is extraordinarily bullish on Tesla, putting a $3,000 price target on its stock. Her target values Tesla at $3 trillion, and more than doubles the highest target assigned by industry analysts. ARK Invest’s optimism reflects its high opinion of Tesla’s insurance business, currently limited to California, and its planned robotaxi service. It places 50/50 odds on Tesla’s achieving fully autonomous electric vehicles within five years, and expects sales of up to 10 million vehicles in 2025.

For all that optimism, ARK Invest ETFs have sold Tesla 14 times since buying on an early July dip this year. Tesla remains the largest position among all ARK ETFs, and the sales may represent minor rebalancing. On the other hand, they may suggest that ARK Invest foresees short-term volatility for Tesla, despite its highly optimistic long-term forecast.

ARK Autonomous Technology & Robotics has also invested heavily in Niu, and owns nearly two million shares of the company. Its most recent purchase of Niu shares may reflect an important shift in the company’s growth strategy. The Chinese government has supported the EV market for years, supporting Niu’s prospects in turn. Niu’s recent announcement of several new models and its increasingly strong presence in Europe indicate that the company believes the time is right for a major increase in sales.

Unlike Tesla, which posted its first sales-driven profit in 2021, Niu posted nearly $32 million in adjusted profits in 2020. It projects sales of roughly one million units in 2021, which would represent YOY growth exceeding last year’s 43%.

Some important considerations for ARK ETFs

Cathie Wood has earned her reputation as one of the most insightful investors in green technology. Her investment decisions, though, may not fit the style of every retail investor—or, in fact, produce the same returns. As with any institutional investor you admire, you should look closely at the reasons behind ARK Invest’s decisions before emulating them.

For our purposes here, you should consider two important factors.

Firstly, Cathie Wood is not just among Tesla’s most ardent supporters: she is among its earliest investors. This does not cast her projections in a dimmer light, but it does mean that she holds a distinct position in Tesla. Having bought into the stock for years, her perspective as an investor may differ greatly from that of most retail investors looking to add Tesla to their portfolios.

Secondly, ethical investors should know that the ARK Invest Autonomous Technology & Robotics ETF includes a position in Lockheed Martin. If your investment philosophy includes avoidance of military contractors, this may be a concern. Lockheed Martin is the world’s largest defense contractor, and nearly 80% of its profits come from sales to the Pentagon. It also produces carbon nanotubes, which have applications in energy storage devices. As always, you should study any ETF’s holdings in detail before deciding to invest.

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