Portfolio manager Cathie Wood's ARK Innovation ETF (ARKK 0.07%) is made up of a who's who of high-flying growth stocks. ARK Invest and Wood focus more on today's hottest companies, buying shares of disruptive innovators. Wood's picks are known more for aggressive upside potential, not for their value or their prospects for profitable expansion in the near term.
Wood has a clear tendency to pick counterintuitive to other famous investors. For instance, one holding you are unlikely to find in Cathie Wood's portfolio is Johnson & Johnson (JNJ -0.69%), a massive healthcare goods and pharmaceutical company. The stock is one of several holdings That famed investor Warren Buffett has in Berkshire Hathaway's (BRK.A -0.28%) (BRK.B -0.68%) portfolio.
In particular, there are three reasons why Wood will probably never touch the stock. Knowing these reasons might be useful for investors who are considering making a purchase of J&J stock.
1. J&J isn't growing quickly in comparison to her favorites
The first reason why Cathie probably won't be buying shares of J&J anytime soon is that it's not exactly a growth stock. Tesla (TSLA 12.06%), which is an ARK holding, has seen its trailing 12-month (TTM) revenue pop 525% in the last five years, whereas J&J's TTM sales rose by just 28.5% over the same timeframe. Likewise, Tesla's stock exploded upward by 1,140% over five years compared to J&J's rise of around 45% (the S&P 500 was up 59% over that time).
To be fair, J&J is a mature and already gargantuan business that simply can't grow as quickly as a company like Tesla that's still getting established in its market. Likewise, Tesla's focus on a new and trendy market segment -- electric vehicles (EV) -- means that it isn't weighed down like many of its competitors by having to maintain internal combustion engine-focused operations as well as expand into a new EV market. That focus on this new and still developing market is a big reason that Cathie Wood prefers a stock like Tesla.
For his part, Warren Buffett likely identifies Johnson & Johnson as having stable, consistent earnings that can be counted on to keep expanding (if slowly) over time. So, if you're looking for a stock to anchor your portfolio's value with steady expansion over time, considering Buffett's case for J&J might be a good place to start, even if Cathie Wood would reject it.
2. J&J isn't explicitly pursuing disruptive innovation in its markets
Johnson & Johnson doesn't have any shortage of innovation per se. In 2021, it spent $14.7 billion on research and development (R&D), which is around 15.7% of its annual revenue.
But that money goes toward developing new pharmaceutical drugs, new medical devices, and new consumer health products. None of those products is individually going to fundamentally change the nature of the biopharma industry, even if they are financially successful. While its medicines and devices might be part of shifting trends, nudging the corresponding markets in a certain direction, they're unlikely to be revolutionary. Wood tends to favor the revolutionary while Buffett would be perfectly comfortable with the dynamic J&J presents.
Consider the ARK Invest stock CRISPR Therapeutics (CRSP -1.35%). It's developing near-curative or curative therapies for hereditary maladies like beta-thalassemia and sickle cell disease. If it succeeds, it won't just contribute another therapy for those conditions to the pile -- it'll likely capture a large slice of the market. Of course, its chances of success are more speculative, but the point is that if it does ultimately succeed, Cathie Wood's fund will experience huge gains.
The opportunity with J&J is much smaller, in part because the company is already so big that it's become extremely hard to generate outsized growth when your top line already exceeds $93.7 billion a year.
3. J&J pays a dividend and is less focused on reinvesting excess capital for growth
The final reason why Cathie Wood won't be buying J&J anytime soon is that it pays out a dividend rather than pushing all excess earnings toward fueling more growth. For the record, Warren Buffett typically dislikes dividends for that very reason, as paying them detracts from accumulating retained earnings for the company to reinvest (and that's why Berkshire stopped paying a dividend when Buffett took over the company). He sometimes makes exceptions to his preference, but with this stock, Wood is unlikely to do the same.
Wood's investments tend to be in early stage businesses, many of which aren't even profitable yet. If those businesses end up with excess capital, it's far more likely to be spent on acquisitions or research and development (R&D) programs than shareholder rewards.
Still, if you're looking for a company with long-term passive-income potential, it could make sense to side with Buffett and buy Johnson & Johnson -- even if Cathie Wood wouldn't.
No investing philosophy works best in all cases
It's important to recognize that neither Cathie Wood nor Warren Buffett has a monopoly on making money by investing. The pair have starkly different levels of risk tolerance and different preferred time horizons for investing, and it's perfectly fine if your preferences match one style more than the other. Both of their approaches have upsides and downsides, and both strategies can yield successes -- and failures too.
