Cathie Wood and her team are known for their aggressive investment style that focuses on megatrends and multidecade growth opportunities. Many of the highest-weighted stocks across the Ark Invest funds are unprofitable growth companies that trade at premium or even sky-high valuations. But there are other holdings that are much more reasonable.
Investors may be surprised that industrial technology solutions company Trimble (TRMB -6.92%) and agricultural equipment company Deere (DE 1.26%) are both top holdings in the ARK Autonomous Technology & Robotics ETF and the ARK Space Exploration & Innovation ETF. Archer Aviation (ACHR -1.25%) stock is also a small holding in the Space Exploration & Innovation fund. Here's what makes each company a great buy now.
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This stock offers excellent growth at a reasonable price
Lee Samaha (Trimble): Positioning technology stock Trimble feels the chill of a slowing economy. Management's guidance for organic sales growth calls for just 2% to 5% for the full year, with CFO David Barnes noting on the recent earnings call, "Our cautious outlook for 2023 organic revenue growth is rooted in an expectation of continued dealer inventory reductions over the next several quarters, and softer end market demand in an environment of limited GDP growth." Moreover, management expects its hardware and software revenue to drop by a low-single-digit percentage this year.
With the bad news out of the way, there are three key reasons why Trimble is an attractive stock to buy. First, its revenue growth is supported by its ongoing growth in annualized recurring revenue (ARR), representing its annualized value of its subscription, maintenance and support revenue, and term license contracts.
Second, the economic slowdown doesn't impact the long-term growth potential of its positioning technology in infrastructure/construction, precision agriculture, geospatial mapping, or transportation. Trimble is adding higher-margin software and analytics solutions to its offerings.
Third, management expects its free cash flow (FCF) to equal its non-GAAP (adjusted) net income. Given that non-GAAP earnings per share guidance is $2.66 to $2.86, the midpoint implies $2.76 in net income and, therefore, $2.76 in FCF per share. The current stock price of $52.50 implies a forward-price-to-FCF multiple of less than 20 times FCF. That's too cheap for a stock with excellent long-term growth prospects.
This 186-year-old business is still a game changer
Daniel Foelber (Deere): Deere is one of the most recognizable brands in U.S. agriculture and construction. But Deere isn't a stodgy low-growth company. Far from it.
The company aggressively invests in artificial intelligence (AI) and believes in the potential for sustainable agriculture. It develops its own software solutions that pair with its machines to reduce costs and make more money for its customers.
Deere is focused on the lifecycle of its customer. This means that even after the big-ticket product sale, it wants customers to return to its dealers or use its technology, which increases the total value of a single customer.
In many ways, Deere is the Apple of agriculture because of its brand power, vertical integration, and industry leadership in innovation.
In February at CES in Las Vegas, Deere showcased its high-tech tractor, which uses AI to save customers 60% on chemical costs. This is just one example of the many ways in which Deere is using technology to widen its gap over the competition.
The downside is that Deere stock has had quite a run-up over the last three years. In fact, it's up 143.8% compared to 22.7% for the S&P 500.
Yet even after the stock's ascent, Deere is still not terribly expensive -- trading at a price-to-earnings ratio of 17.6 and a price-to-book ratio of 6.
Deere's dividend yield is only 1.2%. But that's only because the company prioritizes its operations and long-term investments over buybacks and dividend raises. Deere is an exciting opportunity for investors looking for a high-quality business with growth potential.
Shares of Archer Aviation can soar in 2023
Scott Levine (Archer Aviation): Followers of Cathie Wood pay close attention when one of the Ark Invest funds purchases a given stock. However, they take particular notice when there's consistent buying activity, as was the case recently with Archer Aviation. Showing the love to Archer's stock, the ARK Space Exploration & Innovation ETF bought 200 shares on Feb. 14. The bigger buys, however, came days later. On Feb. 16 and Feb. 17, the same ETF picked up 35,000 shares and 3,714 shares, respectively.
Looking to expand ride-sharing beyond the streets, Archer Aviation is developing electric vertical takeoff and landing (eVTOL) aircraft to help people get from point A to point B. This vehicle may sound like a souped-up helicopter, but Archer argues that its eVTOL aircraft has several advantages, including lower emissions and a better safety profile.
While the company's vision is to reimagine travel around urban centers, its initial plan to demonstrate the value of its service is through a partnership with United Airlines. The two companies inked an agreement in November that entails United offering customers transportation on Archer's eVTOL aircraft between downtown Manhattan and Newark International Airport.
Archer doesn't plan on commencing commercial operations until 2025, but that depends on the company meeting a more immediate milestone: receiving FAA certification for its initial production aircraft Midnight in late 2024. To stay on this timeline, Archer plans on completing design reviews and performing ground testing. Should the company report positive news from these activities indicating that its timeline remains intact, the stock could certainly propel higher.
