Cathie Wood knows growth stocks. And although some of her holdings aren't performing terribly well of late, that doesn't mean they have suddenly become bad buys. In the wake of interest rate increases possibly coming next year and COVID-19 cases spiking yet again, investors have put the brakes on growth stocks. The ARK Innovation ETF, which is synonymous with disruptive growth companies, has fallen 21% this year while the S&P 500 has jumped by 27%.
But the Innovation fund contains many top stocks that I wouldn't bet against over the long haul. Two of the most promising ones to consider as we head into 2022 are Teladoc Health (TDOC -2.91%) and DraftKings (DKNG 0.59%). At their current prices, these stocks could be bargains right now, and investors should take a close look as these levels might not last for long.
Image source: Getty Images.
1. Teladoc Health
It's amazing to see that Teladoc's share price has been cut in half this year. Down by more than 50%, it's a stock you might look at and think the business is in serious trouble to suffer such a fall. And while some losses may have been inevitable after last year's impressive performance, when the stock rose by nearly 140% (dwarfing the S&P 500, which rose only 16%), this sell-off looks to be overdone.
A big part of the reason Teladoc is likely down right now is its inclusion in the ARK ETF, which has drawn investor bearishness of late, plus an assumption that demand for telehealth might drop significantly once the pandemic is no longer a concern.
The former is likely just a short-term trend as growth stocks typically are among the best-performing investments over time. And the latter isn't something I would be worried about at all. For one thing, telehealth is a more affordable option than in-person trips to the doctor's office (it's about half the cost), so there's plenty of incentive for employers to include it as part of healthcare options for their employees.
And the convenience factor shouldn't be overlooked either. Some patients aren't mobile, and a quick telehealth visit can spot issues before they become much more serious. That's where merging with chronic-care company Livongo Health in 2020 was a great move for Teladoc. The transaction only closed in October 2020 and is in its early innings, but this is an area that could take off in the long term.
Measured by its price-to-sales ratio, Teladoc Health is trading at its lowest levels all year. Many analysts see its shares rising to more than $150 -- and some even think it could go over $200.
TDOC PS Ratio data by YCharts.
Teladoc's business is unprofitable right now, but the company has generated positive free cash flow for two straight periods and looks to be on the right track. Over the first nine months of 2021, it has generated $1.5 billion in revenue, more than double the $710 million it reported a year earlier (largely due to the inclusion of Livongo in these numbers).
Buying now while the bears are keeping the healthcare stock down near its lows could be a move you thank yourself for in the future.
2. DraftKings
Another top growth stock you'll find in the ARK ETF is DraftKings. The entertainment and gaming company is aggressively pursuing growth opportunities in the sports betting market. Sports betting isn't legal in every state, but that may just be a matter of time. Since the U.S. government lifted the federal ban on sports betting in 2018, states have been legalizing the practice -- and now more than 20 of them permit some form of betting on sports.
DraftKings is arguably an industry leader here, offering online casino products, a sportsbook, and fantasy sports products as well. For the period ended Sept. 30, it generated $212.8 million in revenue, up more than 60% from the year-ago period.
Like Teladoc, DraftKings isn't profitable today, but the long-term trajectory of its business looks solid. CEO Jason Robins sees a two- to three-year window before the company's investments in new states result in profitability. For investors, that will require patience, especially since acquiring companies (which DraftKings likes to do) can lengthen the time to profitability even further. Plus, eliminating redundancies and fine-tuning operations are not always easy.
One of the company's more notable deals was the announcement in August that it will acquire Golden Nugget Online Gaming for $1.56 billion. Funded entirely through shares, the transaction will have a dilutive effect on the stock price (the transaction will close in the first quarter of 2022). But with 5 million customers to bring to DraftKings, plus Golden Nugget's $36 million profit on revenue of $117 million over the past four quarters, there are many positives investors can pull from this deal.
Year to date, DraftKings stock is down around 40%. and most of those losses have come in just the past few months as growth stocks have come under pressure. It is trading around its 52-week lows, and so this is another attractive option to add to your portfolio for the new year.
