There isn't a wide-scale crash taking place in the markets right now, but individual stocks are falling hard. In particular, growth stocks are hurting badly of late. The best barometer of that is Cathie Wood's ARK Innovation ETF (ARKK -1.60%), which focuses on disruptive businesses.
The fund holds many of the top growth stocks you might want in your portfolio, including its top five holdings: Tesla, Teladoc Health (TDOC -2.33%), Zoom Video Communications, Roku, and Coinbase Global. Excluding Tesla, which has a huge fanbase, all of those stocks (and ARK itself) have crashed by more than 20% since Nov. 9 while the S&P 500 has declined just 2%. What happened? And could any be a good addition to your portfolio now?
Image source: Getty Images.
What happened on Nov. 9?
One possible contributor to ARK's recent weakness is a new investment product. On Nov. 9, the Tuttle Capital Short Innovation ETF (SARK 1.82%) began trading. This exchange-traded fund has a simple goal: to generate the opposite return of the ARK Innovation fund every day. The fund has no broader purpose beyond betting against high valuations, specifically in that one ETF.
Plus, it's convenient. Investors can take a short position against ARK without having to worry about borrowing on margin and all the risks that come with short selling (such as incurring unlimited losses). It's not entirely unreasonable to hedge against growth stocks now, especially if you're worried about valuations and the potential for a market crash.
A high short interest in Teladoc
One of Cathie Wood's favorite stocks, Teladoc, has lately seen a particularly high level of negative investor sentiment. Short interest in the telehealth company is at record highs for the year:
TDOC Percent of Float Short data by YCharts
This is even as Teladoc came off a strong quarter last month and continued to report a record number of telehealth visits. The company is also rolling out Primary360, which aims to give patients more personalized, around-the-clock care. That could help the company build on those numbers next year and beyond, especially as people look for low-cost healthcare options amid rising inflation costs.
There's certainly no reason to justify such a steep sell-off of the stock; yet Teladoc hit a low of $88 this week. It hasn't been at those levels since the start of 2020, well before the pandemic began and back when telehealth wasn't as common as it is today. To suggest that the stock is worth the same amount now is absurd, but it does create one heck of a buying opportunity for investors.
Investors should focus on the fundamentals
It can sometimes be easy to get caught up in a stock's price movement and worry that the business is in trouble. But a sudden drop or surge in price isn't always linked to a significant change in prospects for the business or the industry that it's in, especially in what's become a new era of investing since the pandemic started, where high volatility has become the norm.
Teladoc and other growth stocks in the ARK didn't all of a sudden become worse investments in just the past month. Instead, there looks to be a surge in people betting against these stocks -- possibly because it's easier to do so through the SARK -- and so short interest could continue to rise in the short term.
But I wouldn't be surprised if these declines prove to be short-lived. Just as auto maker Tesla defeated the short sellers, as did e-commerce giant Shopify, quality companies will continue to weather the storm and prevail in the long run. For opportunistic investors, now may be an optimal time to consider loading up on some of these growth stocks while their valuations remain significantly reduced.
