Innovations often come from less-known places. Cathie Wood fully realizes this. While her Ark Invest exchange-traded funds (ETFs) hold positions in many of the most widely followed stocks in the world, she also focuses heavily on identifying diamonds in the rough that many investors don't know much about.
We only have to look at Ark Invest's recent trades to see this in action. Wood has been loading up on these three small-cap stocks.
1. Adaptive Biotechnologies
The Ark Genomic Revolution ETF (ARKG 0.74%) added shares of Adaptive Biotechnologies (ADPT -0.38%) during the first week of December. The biotech stock now ranks as the 15th-largest position in that fund's portfolio.
Adaptive qualified as a mid-cap stock as recently as last year. However, it has lost more than 90% of its value since early 2021, and its market cap now stands below $700 million.
What does Wood like about Adaptive Biotechnologies? The potential for its immunosequencing and immune medicine technologies. Adaptive has two businesses with huge market opportunities.
| Business | Description | Total Addressable Market |
|---|---|---|
| Minimal residual disease (MRD) | Focuses on using next-generation sequencing to measure MRD in patients with blood disorders. | $5 billion |
| Immune medicine | Provides sequencing services and drug discovery to help develop transformative immunotherapies. | $44 billion |
Data source: Adaptive Biotechnologies 10-K. Table by author.
Ark Invest could be even more interested in Adaptive Biotechnologies right now because the company is conducting a strategic review to "maximize the value" of its two businesses. It's possible that this review could lead to a spin-off or sale of one of the businesses.
2. Genius Sports
While the Ark Genomic Revolution ETF was scooping up shares of Adaptive Biotechnologies, the Ark Next Generation Internet ETF (ARKW 0.45%) was busy buying shares of Genius Sports (GENI 0.39%). The sports data and technology company is now its sixteenth-largest holding.
Like Adaptive, Genius Sports has experienced a steep sell-off. The stock is nearly 80% below the high it set in mid-2021. Genius Sports' market cap now hovers around $1.3 billion.
The company's technology is already used by more than 400 sports organizations, including the NFL, NCAA, the English Premier League, and NASCAR. Wood no doubt especially likes the growth of Genius Sports' betting technology business. In the third quarter, revenue for this unit soared 34% year over year to nearly $66 million.
3. Nextdoor Holdings
The Ark Next Generation Internet ETF also gobbled up shares of Nextdoor Holdings (KIND 1.00%) during the first week of December. Nextdoor is still only a tiny position for the ETF, though, making up only 0.73% of its portfolio and ranking in the bottom seven holdings based on the amount invested.
Nextdoor shares a common denominator with Adaptive and Genius Sports -- its stock has plunged over the last couple of years. Today, Nextdoor's market cap is under $650 million.
I suspect that valuation played a role in the decision by Wood and her team to buy Nextdoor shares. She also probably likes the potential for the company's business model.
Nextdoor calls itself "the neighborhood network." It operates a social media platform that connects neighbors and neighborhood businesses and services. This platform reaches roughly one in three U.S. households. The company thinks that it can increase advertising revenue by adding more households in the U.S. and other countries, and by targeting mid-market advertisers.
Should you buy these small-cap stocks too?
Since Cathie Wood is loading up on these small-cap stocks, should you buy them too? Not necessarily.
Adaptive Biotechnologies, Genius Sports, and Nextdoor Holdings are all unprofitable right now. While the stocks could be big winners in the future, they've been big losers in 2023.
Adaptive's top and bottom lines deteriorated year over year in its latest quarter. Nextdoor's revenue increased by just 4%. Of the three, only Genius Sports is generating strong revenue growth.
Aggressive investors willing to take on significant risk could be interested in these stocks. However, I think that there are better opportunities to be found for most investors.