Today I want to discuss several Cathie Wood stocks to buy on the dip. They are big holdings in her portfolios and are likely to see big gains once the market shakes out of its current downtrend.
Sometimes it’s easier to simply piggyback on top of popular mutual funds’ holdings and simply buy them for the long term. That’s because mutual funds have lots of restrictions. Moreover, they have to constantly honor the inflows and outflows of their funds. That means you can’t really copy the weightings that these funds put in any one name.
It’s better to simply identify some of the major holdings and then put your own weightings of them in your own portfolio.
Moreover Cathie Wood tends to like very aggressive momentum growth stocks. Often they can be quite volatile. Most of them have no earnings, and their P/E ratios are negative. This can be seen in the chart on the right.
Moreover, you can see that their performance YTD is almost all negative, with an average negative 41% decline YTD.
It’s best to identify the names and then look for periods of weakness in the stocks. You can buy them on the dip and get a good entry price.
Let’s dive in and take a look at these stocks.
| ZM | Zoom Video Communications | $101.01 |
| TSLA | Tesla | $711.12 |
| ROKU | Roku | $87.02 |
| CRSP | CRISPR Therapeutics | $80.70 |
| EXAS | Exact Sciences | $46.79 |
| TDOC | Teladoc Health | $40.10 |
Zoom Video Communications (ZM)
Zoom Video Communications (NASDAQ:ZM) provides Zoom Meetings as well as HD video, voice, chat, and content sharing. The company makes money mainly from its enterprise customers. Its first-quarter sales were up 12%.
More importantly, it produces a large amount of free cash flow (FCF). That is almost for sure the main reason why Cathie Wood puts it in her portfolios. It reported that adjusted FCF was $501 million in Q1, up 10% from last year’s Q1.
But even more importantly, the company said that its adjusted FCF margin was 46.7% in Q1. That means that almost half of its sales went straight into cash flow generation, to the bottom line. That is the sign of a highly profitable company. Most software companies do not even make such serious profit margins.
Here is why this is important. Analysts project $4.54 billion in sales this year. If 46.7% of that becomes FCF, it will generate $2.12 billion in FCF. Compare that to its $32.2 billion market capitalization. It represents 6.58%.
However, a more realistic FCF yield would be 3%, given how high its FCF margin is at this point. That would put its market cap at $70.67 billion (ie., $2.12 billion/0.03). That represents a potential gain of 119% in ZM stock.
Tesla (TSLA)
Tesla (NASDAQ:TSLA), the electric vehicle manufacturer, is one of the few stocks in the Cathie Wood portfolios that actually make profits. Moreover, the company also generates large amounts of free cash flow.
For example, in Q1 it produced $3.995 billion in operating cash flow, from which $1.772 billion in capex spending is taken out. That leaves $2.228 billion of FCF for the quarter. That also represents 11.88% of its revenue of $18.76 billion during the quarter.
As a result, based on projections of $84.82 billion in sales this year and $115 billion next year, the company will likely generate between $10 billion and $13.6 billion in FCF. Let’s call it $12 billion in FCF on average.
Therefore, at a 3% FCF yield, the company is worth $400 billion. At a 2% FCF yield, it’s worth $600 billion, and at 1% it’s worth $1.2 trillion. That puts its average target value at $733 billion. This is slightly over today’s market value.
However, as the company’s sales and FCF margins keep rising, expect to see TSLA stock rise in line with this growth.
Roku (ROKU)
Roku (NASDAQ:ROKU) is a TV streaming platform that also integrates its streaming and subscription services into certain TVs. Moreover, the company is now moving into its own content production.
So far the company is not profitable on a GAAP basis. However, in Q1 the company became FCF positive. It generated $101.8 million in operating cash flow, from which $14.8 million in capex spending is taken out. That leaves FCF of $87 million on sales of $733.7 million. This means its FCF margin was 11.86% — almost exactly the same as Tesla’s FCF margin.
As a result, it probably deserves a similar valuation. For example, with 12% FCF margins, and with forecast sales of $3.69 billion this year and $4.74 billion next year, Roku will produce between $443 million and $569 million in FCF over the next two years. Let’s call it $500 million on average.
Therefore, at a 3% FCF yield, the stock is worth $16.67 billion (i.e., $500m/0.03). That represents a 40% upside over today’s market value. This is why it is one of the best Cathie Wood stocks to buy on the dip.
CRISPR Therapeutics (CRSP)
CRISPR Therapeutics (NASDAQ:CRSP) develops gene editing technology for precise, directed changes to genomic DNA. Its aim is to produce cures for cancer and other major diseases.
The company has been producing losses on a GAAP basis. However, on a last-12-months (LTM) basis, it is now generating positive free cash flow. This has been the case for the previous four quarters. For example, in the 12-month period ending March, it produced $504.4 million in operating cash flow. After deducting $90 million in capex spending, its FCF was $414.4 million.
But here is the thing – that represents 45.3% of its $915 million in sales in the LTM period. That makes the company worth a good deal. For example, using a 5% FCF yield, its $414 million in FCF makes it worth $8.28 billion (i.e., $414m/0.05). The is the same as a 20x FCF multiple.
This makes CRSP stock worth 35% more than today’s price. That is why this is one of the top Cathie Wood stocks to buy for long-term investors.
Exact Sciences (EXAS)
Exact Sciences (NASDAQ:EXAS) is a cancer screening and diagnostic test maker and service provider. The company can test for colorectal cancer and pre-cancer, as well as for breast, prostate, and colon cancers.
Although not profitable, it still expects to produce over $2 billion in revenue, growing 15% annually. However, unlike the other Cathie Wood stocks to buy on the dip, this one does not yet produce FCF. However, that may take some time, and this is not easy to determine.
As a result, although the cause for this company is noble, it is much more speculative than other ones on this list. Investors should be careful to understand the nature of the company’s operations and outlook.
Teladoc Health (TDOC)
Teladoc Health (NYSE:TDOC) is a virtual healthcare services company that provides non-urgent care. It operates by hiring healthcare professionals who can provide medical advice and prescriptions over the Internet.
So far, the company is not profitable on a GAAP basis, but it did produce an FCF profit in the last 12 months (LTM) to March. This was $170 million, representing 7.9% of its $2.144 billion in sales for the period.
And that is why Cathie Wood owns this stock. It is transformative and has plenty of room to grow.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.