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stock market has grown significantly over the past 12 months. The main driving force behind this growth was the Federal Reserve, led by Jerome Powell. The Fed has printed a significant amount of money through measures such as low interest rates and quantitative easing. And while interest rates will remain low in the near term, they will inevitably rise eventually.
When this happens, the stock market will likely collapse as the main driver of the bull market disappears. One investor, Katie Wood, CEO and Investment Director of ARK Invest, has already predicted the crash I'm talking about. Knowing this, here is a unique strategy to combat this possible stock market correction.
In this video, I'll explain why Katie predicts a revaluation of asset values and how you should prepare. Welcome to Cash Gains Academy. If this is your first time on the channel, please subscribe for new content, and let's get down to business. As I said before, the Federal Reserve can't keep rates low forever, and they will eventually go up.
The stock market is based on predictions of the future, so it is natural that it will adjust even before rates rise. Katie Wood predicted that this correction would affect certain stocks more than others, and her own ETF is one of the prime candidates. Katie's five ETFs have grown significantly over the past few years, with 2020 being her most impressive year yet.
Because of this, Katie even says that her ETFs will likely be hit hard by such a correction. But that doesn't mean you should sell all your shares in innovative companies. We'll look at Katie's strategy soon . However, it seems indisputable to me that you should think about the impact of higher rates on those stocks that have always been proven winners for you—whether it's a flagship fund, a fintech innovation fund, or other areas of your ETFs.
Are n't you concerned that as rates rise, these stocks could fall? Well, I really believe that if rates were to go up sharply, we would see a revaluation of value, and our portfolios would of course be prime candidates for that. By the way, one of the interesting things I've noticed over the last 20 years is that the S&P P/E ratio usually peaks in the range of 20 to 25 forward earnings .
The statistic that Katie just mentioned is the forward P/E ratio for the S&P 500 , which is the expected price- to-earnings ratio for the S&P 500 over the next 12 months . As Katie noted, the forward P/E ratio for the S&P 500 typically peaks in the 20 to 25 range. The current estimate for the forward P/E ratio for the S&P 500 for the fourth quarter of 2021 is 25.
Because of this, Katie Wood is hinting that a correction in the stock market is imminent. Now that we know this, you may ask: how can we use this knowledge to our advantage? Uh, I agree with you, Scott. There will be a revaluation of the value of assets. There will be fear, I'm sure, and we will use it to our advantage by focusing our portfolio on the assets we believe in the most.
Uh, but I think that in the long term, especially given the strong growth trajectories of the five innovation platforms around which all of our research is built, those trajectories are so strong that these companies will grow and justify their multiples much faster than most investors expect right now.
So, this is the source of our confidence. What Katie just said is extremely important. Although a stock market crash is inevitable, there is no need to fear it. In fact, a stock market crash is a rare opportunity to bet on the stocks you believe in the most. This means exiting stocks you are less confident in and buying those you believe in the most.
Another point that Katie emphasizes is key to understanding her long-term vision. Company valuations are undeniably high right now . After all, if you look at the price/ sales and P/E ratios of stocks in today's market, you can clearly see that many of them have reached very high levels. However, if you believe the business will grow extremely rapidly in the next decade, then why would you sell these shares?
Eventually, if this business continues to grow rapidly for many years, its price-to- sales and P/E ratios will return to normal values. According to Katie Wood, these are the types of companies you should invest in. In companies that are about to demonstrate significant growth. By this I mean companies that will grow so rapidly that their current multiples will decline significantly in the future.
Some of you may be asking yourself if it's a good idea to sell some of your shares now. After all, if a correction is inevitable, why not sell now and buy later? This is where Katie Wood's unique strategy comes into play. So my question complements what Scott just asked. Do you take into account or have any interest rate forecasts and do you adjust the portfolio according to that forecast, do you hold cash there, and are ETFs interesting given the level of cash that is allowed or not allowed to be held?
Um , so how do you do it? So, the stakes are now rising. Do you say, "Okay, we might have a little problem with this reassessment." " They're going to jump even further, well, let's say, to 2%." Are you proactive or just accepting things as they are? No, we actually use it. And so over the last 6 months we have been increasing the number of names in our portfolio, and we are doing this as the bull market expands, because to some extent it is a tax-efficient strategy.
During a correction, especially one as severe as a crisis, we will sell stocks that are currently creating losses because we bought them, diversified, and bought them recently. We sell those loss-making assets to buy those we believe in the most. You may notice that some of the names we're moving into are, for example, large biotech companies: Regeneron, Novartis, Takeda.
And we think of them as cash equivalents, but there's also an investment reason why we're moving into them. Ironically, we consider them to be deep value assets because these companies we select are able to leverage the convergence of technologies that is happening today in the genomic revolution. So, DNA sequencing, again artificial intelligence, gene therapy, new technologies, new ways of working.
The strategy that Katie Wood talks about is somewhat unconventional. Instead of stocks that currently accumulate cash, Katie Wood is buying what she calls “ cash-like stocks .” These are stocks that are currently undervalued and will not fall significantly lower during a stock market correction. The strategy is to buy these " cash" stocks now, and if a correction occurs, you will sell them to buy stocks with high growth potential.
Katie called these stocks deep value stocks, and for good reason. The three names she mentioned— Regeneron, Novartis, and Takeda—are undervalued by their financial metrics. If we look at Regeneron, we see a forward P/E ratio of 10. In addition, Novartis has a forward P/E of 14, while Takeda has a forward P/E of just nine.
These are very low estimates, especially in today's bull market. However, they don't have such a discount for nothing . These are not growth stocks like Tesla or Amazon. At the same time, these are not dying companies like Nokia or Blockbuster. These stocks are expected to grow at a relatively slow and steady pace.
In fact, some of them don't grow at all. Takeda's revenue is expected to decline by 1.2% in 2021 and by 0.1% in 2022. With stable earnings and revenue figures, these companies are a great alternative to cash. It is worth investing in them instead of holding cash because of the win-win situation they offer.
These two situations are continued market growth and its collapse. The first situation: the bull market continues. Although we are almost certain that a correction in the stock market is inevitable. We don't know exactly when this will happen. If the bull market continues, these stocks won't fall much.
In fact, they may not even fall at all. Katie makes a strong case for why these stocks will rise in value in the coming years, and we'll get into that shortly. In the first scenario, the bull market will only continue if the Federal Reserve continues to print money. In that case, inflation is inevitable, and these companies are an excellent hedge against it.
If you hold cash, the Fed will simply continue to print money and the dollar will depreciate. If you hold these undervalued stocks, you are protected from inflation because these companies sell goods that are insensitive to it. The second situation is a stock market crash. In this case, these undervalued stocks wo n't be hurt as much.
The stocks that will suffer the most will be those that have already increased significantly in price. Stocks like Tesla, Square, and Roku are likely to fall the most during a crash because they are more volatile. In a bearish scenario, after a market crash, you can sell these undervalued stocks and buy Tesla, Square, or Roku at a discount.
This way, you won't lose a lot of money on undervalued stocks and will be able to buy promising assets cheaper. As we can see, in both scenarios, undervalued stocks play a fantastic role. Now let's look at why Katie expects these deep value stocks to appreciate over the next few years. Uh, they're actively investing now.
They are forced to do this because they have lost many of their developments or will soon lose them. Uh, and we think that the returns on investments in biotechnology, and I mean the big biotechnology companies, if they do everything right, could go back from today's high single digits to the " golden age" of healthcare.
So, in the 80s, we saw rates of 20 to 30%. We use them as a kind of cash tool because we will move back to our core assets, uh, if a major correction starts, but we also see investment appeal in these names. These are simply not core assets. So we use corrections, switching back and forth . And right now, there are about 52 positions in our flagship, uh, flagship portfolio.
At the low point of the coronavirus crisis last year, I think there were only 33. As Katie pointed out, deep value stocks are not just slow- growing stocks. Large biotech companies like Regeneron and Takeda are looking to innovate in the ways they serve their patients. If these innovations are successful, their market share could grow three to four times.
If their innovation fails and the stock market crashes, then Katie will simply sell all those shares of big-name biotech companies and buy her own shares with high conviction. In my opinion, this is a pretty smart strategy. It offers the potential for high returns if these biotech firms can introduce innovative products and services, but also provides downside protection in the event of a decline in the entire stock market.
However, I am not a fan of selling most of my shares with high conviction even at such valuations. By the way, my Patreon is now open with limited space. By joining, you will gain access to my full stock portfolio, exclusive buy and sell alerts, valuation tables, and much more. If you're interested or just want to learn more, check out my Patreon at the link in the description below. , see you in the next video.
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