The Sea episode illustrates Wood’s strategy of reviving the stricken fund via a blend of placing daring new bets and doubling down on longtime favorites that have fallen hard of late. So far, Wood’s gambit is proving a flop. In February, all of her six largest buys, though plucked at super-steep discounts to the highs reached mainly late last year, have kept dropping. The declines in those newly added holdings have further hammered ARKK’s woeful performance.

Put simply, Wood’s been “catching falling knives.” That’s Wall Street argot for when an investor purchases a super-high-risk stock that looks cheap because it has fallen sharply, but keeps tumbling, for good reason. The buyer thinks it’s an alluring red rubber ball that’s poised to bounce. The fundamentals say it’s a plunging blade that will draw blood. Those sharp-pointed stocks are typically the ones whose prices—even after big declines—remain so outsized alongside their meager earnings that they’ve still got a long way to fall.

ARKK’s record has fallen from spectacular to terrible, and the new buys won’t help

One of the biggest stories in the recent tech rout is how much worse Cathie Wood’s ARK Innovation ETF is performing than the overall category. Since peaking at $157 in mid-February 2021, ARKK has dropped 60% to close at $63.47 on Feb. 22. Over the same period, the Nasdaq garnered a positive total return of around 2%. Amazingly, since the start of 2018, ARKK has vastly lagged Invesco’s benchmark Nasdaq 100 (QQQ) index fund by delivering gains of 83%, half the QQQ’s total return of 170%.

Her signature fund’s retreat has stirred arguably the most passionate, well-publicized defense from a big-time money manager in the recent annals of Wall Street. On Feb. 18, Wood took to CNBC, claiming that ARKK’s recent meltdown epitomizes “a massive misallocation of capital” that’s “the biggest in the history of capitalism.” She characterized her research as “the best in the financial world for disruptive innovation,” and stated that investors “should take risks [on stocks] that are potentially game changing” instead of sticking to the likes of Apple and Amazon. To Wood, the old-line champs will underperform in the years ahead as her venturesome picks surpass their technologies and post gigantic returns—especially starting at today’s supposedly irresistible, beaten-down prices. In fact, Wood was declaring months ago that her stocks occupied “deep value territory” when they were 20% pricier than today.

In February, ARKK made relatively large investments in six stocks. It’s instructive to review those purchases to assess how far they have already fallen in just over two weeks, and whether they currently look inexpensive and hence set for explosive gains, as Wood avows. All purchases except for Sea Limited increased existing holdings. To be sure, the general malaise in tech stocks during the first half of February contributed to the declines. Still, all six stocks not only fell substantially, but in every case also posted double-digits drops that far exceeded the QQQ’s overall pullback of 6.9%.

The smallest buy of the half-dozen was the addition to ARKK’s Robinhood holdings. The commission-free trading platform that’s a favorite with Gen Zers had already dropped from $35 in early November to around $15 in late January. At that point, it took another hit when the market digested Q4 earnings that disclosed a decrease in active users and a large bump in expenses. Between Feb. 1 and 14, ARKK spent around $13 million to acquire 970,000 shares at an average price of $13.50. At the close on Feb. 22, Robinhood was selling for $11.31. ARKK’s loss over just two weeks: 16.3%.

Ranking fifth in dollars was ARKK’s new purchases in its largest holding by far, Tesla. After notching an all-time high of over $1,200 in early November, Tesla shares slid to $940 in late January. Then its stock took another leg down on Q4 earnings news. CEO Elon Musk disappointed investors by announcing that the world’s leading EV maker would introduce no new models in 2022 and wouldn’t work on its eagerly awaited $25,000 version this year. Apparently lured by the substantial decline in the stock price from its peak, ARKK from Feb. 1 to 7 accumulated 33,000 shares at a cost of $31 million, and an average price of $937. By Feb. 22, Tesla had dropped to $822, putting ARKK’s loss so far at 12.3%.

In fourth place is Twilio, the cloud communications platform. By the time ARKK started lifting its position in February, Twilio had already declined around 50% since October. It wasn’t bad news that pounded its shares to that point or since, but rough times in general for high-valuation names still booking heavy losses. From Feb. 1 to 17, ARKK spent $44 million for 235,000 shares at average prices of $186. The knife kept falling. By Feb. 22, Twilio was fetching $161, putting the ETF’s deficit at over 14%.

Occupying the third spot is Roblox. Customers and especially kids tap the Roblox site to invent and play thousands of 3D online games. Like so many of ARKK’s holdings, Roblox shares cratered since last winter, shedding over one-half by Feb. 15. That day, Roblox unveiled a quarterly loss twice the size that Wall Street expected. That news spurred questions on whether Roblox’s audience would fade along with the stay-and-play-at-home economy. The next day its price dropped 27% to $53.87. ARKK made three purchases before that plunge, then reloaded big-time après the shock on Feb. 16 and 17. All told, the ETF purchased 1.27 million shares at a norm of $61.40. But Roblox’s descent didn’t stop with the two-day pounding following the earnings surprise. It closed Feb. 22 at $48.22, handing ARKK a loss to date of 21.5%.

Continuing the countdown, in second place is Block, the point-of-sale payments manufacturer formerly known as Square. Block followed the familiar pattern of ARKK’s superexpensive, loss-making holdings, declining by about 50% between October and late January. Then, PayPal announced in its Feb. 1 earning release that it was losing eBay as a customer, leading analysts to question its growth prospects. The news rocked the payments space, sending Block’s shares tumbling 11% on Feb. 2. The drop in the price of Bitcoin was another headwind, since one of Block’s most popular features is its Cash App, which allows folks to buy and sell the signature cryptocurrency, and CEO Jack Dorsey holds around $400 million in Bitcoin in Block’s treasury.

The famously contrarian Wood viewed the drop as a buying opportunity. ARKK made a giant purchase of 362,000 shares on Feb. 2 at around $115. The next day, Block fell another 10% or so to $103. ARK bought 235,000 more shares that day and wagered big again on Feb. 10 at approximately $115. But Block’s slump wasn’t finished. It ended Feb. 22 at $94.05. In all, ARKK added 740,000 shares for $85 million, at an average price of $115. ARKK’s newly acquired Block shares sit underwater by 18.3%.

Topping the list is Wood’s new discovery, digital game and e-commerce outfit Sea Limited. Its shares fell around 60% from early November to mid-February on concerns that its growth prospects didn’t justify its then valuation of over $170 billion. It took another blow on Feb. 14, when the Chinese government banned its bestseller Free Fire. ARKK bought a gigantic 679,000 shares before that haymaker struck between Feb. 1 and 10. All told, it paid $157 a share. But the template repeated. After a long steep decline and another sudden dip on bad news, Sea kept sliding. When the bell rang on Feb. 22, it was selling at $126. ARKK has thus far taken a beating of 20%, or $28 million, on this new favorite.

ARKK’s additions look way overpriced even after the big declines

In total, ARKK’s almost $400 million investment in those six stocks has already shrunk by 19% in just 15 trading days. The new buys have also caused a significant shift in ARKK’s holdings. It now parks 21.4% of its portfolio in those half-dozen names, an increase of almost four points since the start of February. So what are the chances they are really in the “deep value” category that Wood claims for ARKK overall, and hence harbor excellent prospects for achieving the huge gains she’ll need just to reach breakeven, let alone far outpace the Apples and Amazons?

Five of the six are registering large net losses, including $950 million and 33% of revenues for Block, and $3.7 billion and 200% of sales for Robinhood. Tesla’s the only profitable member; the downside is its formidable P/E of 175. Let’s look at the six as one big company, of which ARKK owns a share. If you prorate the earnings attributable to ARKK through its percentage stake in each of them, it’s getting $1 in profits for each $705 in market cap. Put another way, the combined multiple for the big February buys exceeds 700.

Wood’s practice of plowing hundreds of millions more into stocks that have dropped a lot but are still typically losing major money or, at best, selling at huge P/Es, is a danger signal for investors. Her narrative might be summarized as, “Forget conventional metrics and get lost in the dream.” But it’s the stalwart measures that always win; you just don’t know when. These falling knives will likely keep plunging, leaving a bloody trail.