In this article, we will look at the 10 Worst Aerospace Stocks To Buy According to Short Sellers. Let’s look at where Rocket Lab USA Inc. (RKLB) stands against other aerospace stocks.
The world is in a constant state of turmoil. Geopolitical tensions are escalating, leading to full-blown wars in certain world regions. While such tensions are dealbreakers for several industries, the aerospace and defense sector runs on a different model. Ironically, increasing geopolitical tensions are one of the most positive signs of profitability for these companies.
One of the critical drivers of revenue for such companies is government contracts for military-grade weapons, aircraft, and defense systems. The increased risk of war boosts defense spending, landing aerospace and defense companies more contracts. With defense stocks soaring after Iran’s recent missile attacks on Israel, investors are wondering if this is an overreaction to the ongoing conflict.
Scott Ladner, Chief Investment Officer at Horizon Investments, joined CNBC on October 2nd to discuss tensions in the Middle East and defense stocks. He sees potential in small caps and cyclical sectors if the economy cools. He said that although investors shouldn’t do anything in terms of the port strike stuff, it was too early to predict things related to the conflict in the Middle East.
The market tends to look through it very well when we look at the conflicts that have arisen in the region in the past. However, since Iran’s recent missile attacks on Israel seem more serious, the situation needs to be watched carefully. Despite that, Ladner says that he is optimistic at the present and believes they will find a way through the situation.
He is also of the view that the world is not getting any safer, with more money being put aside for defense. Apart from the situation in the Middle East, special threats from China and Taiwan, although not an urgent concern, also require careful attention. These circumstances make investing in defense stocks a reasonable choice in the present.
Sheila Kahyaoglu, a Jefferies defense analyst, joined CNBC’s ‘The Exchange’ on October 1 and said that the base case for US defense spending is in the 3-5% range. She also said that certain stocks in the defense sector have a potentially high revenue upside due to the events unfolding across the world.
Growth in Aircraft Orders
While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26, Tony Bancroft from Gabelli Funds said he had noticed significant growth in aircraft orders, with both Boeing and Airbus holding a 12-year backlog of orders. He listed three reasons for this growth. The first catalyst, according to his perception, was China. China accounts for around 20% of the growth in orders to cater to the growing middle class in both India and China. This middle class has an increased inclination for travel.
Secondly, business travel has bounced back to pre-pandemic levels of 2019, marking another critical factor for this growth. Bancroft highlighted the rising middle class in the US and the world to be the third factor. This middle class is growing air travel and contributing positively to economic growth in the industry.
Trends in the Aerospace and Defense Industry
The aerospace and defense (A&D) industry experienced a revival in product demand in 2023. According to a report by Deloitte, domestic commercial aviation revenue passenger kilometers in the aerospace sector exceeded prepandemic levels in most countries. The increase in air travel has prompted an increased demand for new aircraft and aftermarket services and products across the globe.
The demand for weapons and next-generation capabilities in the US defense sector drove solid demand in 2023, primarily due to the ongoing geopolitical conditions and the prioritization of modernizing the military. This growing demand for A&D products is expected to continue throughout 2024.
Our Methodology
To list the 10 Worst Aerospace Stocks To Buy According to Short Sellers, we used the Finviz screener, ETFs, and rankings to first identify 30 Aerospace stocks. Next, we narrowed our list by selecting the 10 stocks that have high short interest but also a high number of hedge fund investors. Finally, these stocks were ranked in ascending order of their short interest. We have also added the number of hedge funds holding each stock as a secondary metric.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Rocket Lab USA Inc. (NASDAQ:RKLB)
Short % of Float: 16.43%
Number of Hedge Fund Holders: 15
Rocket Lab (NASDAQ:RKLB) is an end-to-end space company that designs and manufactures spacecraft and spacecraft components, small and medium-class rockets, and related services and software to support the space economy. It also delivers spacecraft design services, reliable launch services, spacecraft components, spacecraft manufacturing, and other on-orbit and spacecraft management solutions that ease access to space.
The company operates in two segments: the Space Systems segment and the Launch Services segment. The Space Systems segment comprises spacecraft components, spacecraft engineering and design services, spacecraft manufacturing, and on-orbit mission operations. The space systems segment provides solutions that make up the building blocks for spacecraft, including reaction wheels, solar solutions, composite structures, separation systems, radios, power solutions, and command and control spacecraft software. The Launch Services segment encompasses launch and launch-related services on a ride-share or dedicated mission basis.
Rocket Lab’s (NASDAQ:RKLB) biggest competitive advantage is its ability to establish its own space capabilities and constellations. It can build and launch its own spacecraft at cost without having to wait in line for limited launch capacity. With the demand for data and services provided by spacecraft continuously increasing, the company is in a position to deliver long-term recurring revenue and incremental value for shareholders.
Apart from its long-term competitive edge, the company is delivering solid fundamentals. Revenue for Q2 2024 surpassed the $100 million for the first time in company history, reaching $106 million. It also achieved a 15% quarter on quarter increase and 71% year on year increase, showing the company’s continued strength in offering diversified services and products. This growth is primarily driven by a significant growth in its space systems business and increased launches. As of Q2 close, the company’s backlog sits at more than $1 billion.
Overall, RKLB ranks FIRST among the 10 worst aerospace stocks to buy now according to short sellers. While we acknowledge the potential of RKLB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RKLB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.