I Don’t Often Buy Disruptive Tech Stocks, But When I Do, I Buy These 3 ‘Emerging Amazons’

Summary

Cathie Wood and her ARKK ETF have burst onto the scene over the past year and a half thanks to an outstanding performance that crushed the rest of the market.

Despite underperforming high yield YTD, ARKK’s valuations remain largely stretched.

That said, we do see three emerging Amazons in their respective industries among her holdings.

Looking for a portfolio of ideas like this one? Members of High Yield Investor get exclusive access to our model portfolio. Learn More »

summerphotos/iStock via Getty Images Cathie Wood and her disruptive innovation ETF ( ARKK ) have burst onto the scene over the past year and a half thanks to an outstanding performance that left the rest of the market in the dust.

Despite high yield ( SPYD ) ( DIV ) crushing ARKK this year so far, we believe ARKK’s holdings’ valuations remain stretched. Data by YCharts In fact, we see a poor total return outlook for ARKK as it faces the following headwinds:

> A hefty 0.75% management fee on the value of ARKK’s holdings regardless of the fund’s performance will weigh significantly on total returns for investors. As Warren Buffett says: “Performance comes and goes, but fees last forever.”

The heavy volatility of the fund and its underlying holdings combine with its large size to make transactions suffer a lot of Bid-Ask spread drag.

Finally, the move towards a post-COVID-19 economy eliminates some of the biggest tailwinds for most of its businesses even as their valuations remain significantly elevated from pre-COVID-19 levels.

As a result, we maintain limited exposure to Cathie Wood stocks and instead typically prefer investing our money into undervalued, high-quality dividend stocks as we discuss in Forget ARKK: 3 Reasons Why I’m Buying High Yield Hand-Over-Fist Instead .

That said, we do see three emerging Amazons in their respective industries among her holdings, which we do own and will detail in today’s article. What Do We Mean By “Emerging Amazon?”

Before we discuss the picks, we want to briefly define what we mean by “emerging Amazon” so you can better understand the lens through which we see these other stocks.

By “emerging Amazon” we mean companies that possess significant early mover, network, and data advantages in industries with massive disruption and/or growth potential and whose mission sets them up to grow with the disruption and/or grow via disrupting their respective industry. AMZN did this, of course, primarily in the retail space by enjoying status as an e-commerce leader and leveraged its strong network and data advantages to generate decades of massive growth and become a dominant player in retail to the point of reinventing the consumer shopping experience and expectations for customer service.

Despite all of the technological innovation that has taken place over the past decade, in particular, there remain several massive industries that are full of corrupt and opaque practices and plague consumers with massive and unnecessary inefficiencies, making them ripe for new “Amazons” to emerge and completely disrupt the business model and consumer experience.

Thanks to recent market volatility, we have had golden opportunities to open positions in three such companies recently and will discuss our theses on them in the paragraphs that follow. #1. Coinbase Global ( COIN )

COIN isn’t just an emerging Amazon in our eyes, its own management recently said its goal was to become one on its latest earnings call : We want to be the Amazon of [crypto] assets Thus far, COIN is off to a great start with its visionary CEO Brian Armstrong casting a vast vision for the company that involves leveraging its current top-tier position as a cryptocurrency exchange and institutional crypto partner of choice to develop the global crypto economy.

The company enjoys several competitive advantages that we believe will enable it to achieve its ambitions and which will combine with the massive growth potential of cryptocurrency and blockchain technology to upend the current financial industry.

First, its large retail and institutional networks give it an enormous network effect advantage similar to what AMZN enjoys, thereby enabling them to attract their pick of business partners in maximizing their offerings and developments of crypto assets which in turn serves to attract more retail and institutional customers. This then establishes a virtuous cycle that should enable COIN to grow with the broader crypto economy without having to compete viscously on price over crypto exchange terms, much like AMZN is no longer focused solely on offering the best retail prices on all of its products either.Second of all, its superior data […]

source I Don’t Often Buy Disruptive Tech Stocks, But When I Do, I Buy These 3 ‘Emerging Amazons’