Buckle up. The space exploration sector is about to blast off and stock prices will never be the same.
Space stocks surged Thursday after ARK Investment, a management firm that fills its ETFs with disruptive companies, filed with the Securities and Exchange Commission to list a new exchange traded fund largely dedicated to space business companies.
Investors should look at L3 Harris Technologies, Inc. (NYSE: LHX) before the masses arrive.
I’m on the record plenty of times making the case for space investing. Advances in rocket science have made launching payloads into orbit much less costly.
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At the same time, all the usual improvements in machine learning, robotics and sensor technology are pushing the cost of developing extraterrestrial satellites off a cliff.
That’s a really good investment story.
As you might imagine, venture capital is flowing freely. Unfortunately, there aren’t a lot of publicly traded names for investors to consider.
A solid bet for most investors would be an ETF leveraged either to space travel or the technology behind it.
Led by Catherine Wood, ARK Investment was a star performer last year. Many of its funds posted triple digit returns in 2020 as holdings in disruptive technologies soared. The flagship ARK Innovation ETF (NYSE: ARKK) returned 170% in 2020 and grew its assets under administration more than tenfold to $22 billion, according to a report in Barons.
The fund is now the largest actively traded ETF in the world.
This is not rocket science, pardon the pun. Any ETF run by ARK is going to attract a lot of new capital. Money follows winners. The problem is there still isn’t much supply of publicly traded aerospace stocks to be found.
The perception is that the big aerospace businesses are heavily oriented toward defense. And the smaller pure play companies have either rallied sharply in 2020, or they have succumbed to takeovers from larger businesses.
In the former category is Maxar Technologies (NYSE: MXAR), which I wrote about last June when shares traded at $15. The tiny Colorado company operates a constellation of geospatial satellites that managers claim will soon become the evolution of GPS.
Better sensors coupled with improved 3D software is supposed to help application developers determine exactly where things are in the world, and where they are moving to. Maxar shares surged 19% Thursday to $45.60.
Arojet Rocketdyne Holdings, Inc. (NYSE: AJRD), a maker of rocket engines, fell into the second category and was acquired for $5 billion December 2020 by Lockheed Martin Corp. (NYSE: LMT).
These moves leave slim pickings for ARK Investment.
Still, there might be a little wiggle room for ARK managers.
The SEC filing says ARK managers plan to invest 80% of available funds in businesses defined as “leading, enabling or benefitting from technologically enabled products and/or services that occur beyond the surface of the Earth.”
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This brings us at last to L3Harris Technologies, created by the merger of L3 Technologies and Harris Corp. The 2019 marriage created a giant aerospace and defense contractor. Based in Melbourne, Fla., the company has a significant defense communication business across land, sea, air and cyber.
The aerospace business is concentrated in three segments. Its software division has a platform to protect military satellites from debris. The small satellites segment focuses communications used for avionics communications and GPS. And the payload processing prepares satellites for launch.
Satellites are not simply loaded into a rocket and put into orbit. The payload, especially classified military satellites, must be processed in facilities that can avoid damage to their sensitive radio frequency equipment. L3Harris has a state-of-the-art facility in Vandenberg, Florida.
Of the 50,000 L3Harris employees, about 40% are scientists. And the company is investing 4% of sales into research and development each. Sales reached $12 billion in 2019.
The investment mission of ARK is to look for disruptive innovation. If history is any indication, the investment manager firm will soon have hundreds of millions to invest in companies like L3Harris. That influx will push shares sharply higher.
Shares trade at 14 times forward earnings and 2.2 times sales. The stock traded to $220 in February 2020 before dropping in response to the economic volatility.
While recent levels have been near $190, $220 is certainly in play as new institutional investors take another look at aerospace valuations.
Best wishes,
Jon D. Markman
