It's no secret that the market has been selling off riskier assets lately. It's likely due to a combination of geopolitical risk, tightening interest rate policy, and -- more importantly from our perspective -- a reversal from frothy valuations. As such, it's time to start looking at some of the beaten-up technology companies that still have excellent long-term growth prospects.
A good place to start would be in the holdings in Cathie Wood's ARK Investment Management ETFs. Wood is a leading fund manager who specializes in innovative companies with disruptive technologies and long-term potential. So here are four ARK ETF holdings for your consideration.
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Trimble
The top holding in ARK's Space Exploration & Innovation ETF, positioning company Trimble (TRMB -0.50%) is an exciting way to play the change in how companies work with digital technology.
Trimble provides hardware, software, and services to help companies connect and monitor their physical assets and activity with the digital world. Examples include transportation companies monitoring and controlling their trucking fleets in real time. Construction companies use Trimble technology to do the same with equipment to reduce waste and better follow design models. Another key end market comes from farmers using precision agriculture to guide everything from preparing the soil to planting, nurturing, and harvesting.
Trimble's long-term growth opportunity comes from the growing adoption of these smart technologies in improving work processes. It's a revenue growth opportunity and a margin expansion opportunity, as it should lead to more higher-margin software and recurring services revenue in the future. Meanwhile, the stock is down about 25% from its recent highs and trading at roughly 25 times expected earnings per share (EPS) for the next 12 months.
Deere & Co.
Speaking of precision agriculture, ARK holding and agriculture and construction equipment company Deere & Co. (DE -0.14%) is firing on all cylinders right now. Sales of its agriculture equipment are being boosted by a rise in key crop prices (wheat, corn, soybean) not seen since 2014. In addition, strong take-up rates of its precision agriculture solutions have led management to forecast 20% to 25% sales growth in fiscal 2022 (Deere's fiscal year ends on Oct. 31) in its production and precision agriculture segment. In addition, small ag and turf sales are forecast to grow 15% to 20% in 2022.
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Finally, ongoing recovery in construction activity and a positive outlook for road spending have led management to forecast 10% to 15% growth in sales in 2022 within the construction and forestry segment.
Investors constantly fret about where Deere is in the agriculture cycle, but as long as crop prices stay elevated, Deere should have good growth prospects. Throw in underlying growth from precision agriculture and infrastructural spending on roads, and the outlook is even better. While Deere's stock is actually trading close to its 52-week highs, its valuation around 17 times forward EPS leaves room for growth.
Alphabet
Google's owner Alphabet (GOOG -1.96%) (GOOGL -1.97%) is held in two ARK ETFs, a demonstration of the search engine giant's capability to appeal to a range of investors. I use the word "capability" to reflect on the incredible financial firepower at management's disposal. Simply put, its leadership has a golden opportunity to generate significant amounts of wealth for shareholders.
The numbers are staggering. According to Wall Street analyst estimates, Alphabet will generate $237 billion in free cash flow (FCF) in the three-year period ending in 2023. That's only a few billion shy of the market cap of the darling of the last tech stock boom, Cisco Systems. In other words, Alphabet could buy Cisco in three years and still grow its business at the mid-teens rate Wall Street is expecting.
Meanwhile, at recent prices, Alphabet was valued at just 22 times estimated FCF for 2022. That's an excellent multiple for a company growing revenue and earnings at a mid-teens rate. Throw in the possibility that management generates value through product development and acquisitions, and Alphabet remains an excellent value stock.
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Magna International
Auto parts manufacturer Magna International (MGA -1.04%) is in ARK's Autonomous Technology and Robotics ETF. The stock is attractive for two reasons.
First, after a few challenging years, the automotive industry looks set for a multiyear ramp in light vehicle production (LVP). The auto chip makers are investing heavily to expand capacity, and industry observers expect the chip supply issue to ease through 2022. As a result, LVP should improve through 2022, especially in the second half.
Second, most of Magna's products are equally relevant in electric vehicle production. Some of them (electric drive systems, advanced driver assistance systems, battery enclosures, and contract vehicle manufacturing for companies like Fisker) are beneficiaries of a shift to EV production. Moreover, Magna is actively investing in electrification solutions.
It all adds up to a favorable multiyear outlook, and with the stock recently trading at 16.5 times estimated FCF for 2022, Magna looks like an excellent value.
