A Precision Investment Strike
Attack of the flying robots!
The above sentence reads like the title to a cheesy late-night horror film, but for military strategists, it’s a daily reality. It’s also a once-in-a-generation opportunity for investors.
In this overbought stock market, one of the smartest investing tactics is to pinpoint unstoppable trends that will play out for years to come, regardless of economic ups and downs or how the coronavirus pandemic pans out. One such trend is increasing military and commercial demand for pilot-less drones, aka unmanned aerial vehicles (UAVs).
AeroVironment (NSDQ: AVAV), the leading manufacturer of UAVs, is your best bet on this fast-growing industry. With a market cap of $2.7 billion and based in Arlington, Virginia, the company boasts a pipeline stuffed with autonomous flying vehicles that the military brass covets.
But it’s not just warfighters. Drones also pervade the commercial sector, as reflected by Amazon’s (NSDQ: AMZN) big investment in drone delivery. AeroVironment is a major military contractor but it would benefit the most from the mainstreaming of small-scale civilian drones, because these miniaturized UAVs are its specialty.
The following chart depicts the enormous multi-year growth ahead for commercial drones:
AeroVironment’s forte is making small and nimble UAVs that have the ability to carry payloads and are fitted with GPS systems and contact avoidance systems. These are the types of units that would help Amazon’s Jeff Bezos realize his bold vision of delivering packages door-to-door via drones. Other major retailers are getting into the drone delivery business as well.
Pilot-less drones are revolutionizing the projection of power around the world. Republican and Democratic presidents alike have widely deployed “hunter-killer” drones in combat theaters overseas. Since the terrorist attacks of September 11, every U.S. administration has proposed big hikes in spending on drones.
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Drones also provide a way for politicians to deploy aggressive military action, while also limiting casualties among U.S. troops. Fact is, a drone is always willing to die for its country.
A “drone caucus” has emerged in the halls of Congress that fiercely protects UAV funding and touts these futuristic aircraft as a way to help save money on defense, better patrol America’s borders, and assist law enforcement agencies in surveillance.
UAVs have become a ubiquitous feature on the 21st century battlefield, since combat operations were launched in Afghanistan in 2001. Even as U.S. troops are withdrawn from Afghanistan this year and America’s longest war winds down, the Pentagon will continue to patrol Afghanistan’s skies with armed drones.
In the military sector, UAVs also benefit from the trend towards information warfare and net-centric systems. UAVs are a crucial component in the emergence of intelligence, surveillance, and reconnaissance (ISR).
AeroVironment offers a broader array of UAV products than any of its competitors, especially ultra-sophisticated drones predicated on nanotechnology.
The company’s UAVs provide a range of military and civilian functions and feature such evocative names as Raven, Wasp, Puma and Switchblade. The company also makes “green tech” systems for cleaner, more efficient transportation and energy production, a growth area as nations implement policies to fight climate change.
Coming to your neighborhood…
According to the aerospace/defense consulting firm Teal Group, a massive civilian and para-public UAV market will emerge over the next decade, as increasing numbers of federal organizations such as the Coast Guard, Border Patrol and even the Forestry Service require airborne surveillance and monitoring systems. Local law enforcement organizations in countries around the world use drones for policing functions.
Individuals are taking to drones as well, for personal use. The number of consumers registering drones and applying for drone pilot licenses has soared, according to the Federal Aviation Administration (FAA). The agency is bracing for the likelihood of millions (yep, millions) of unmanned aircraft filling the nation’s skies.
In addition to a burgeoning number of commercial uses for drones, such as agriculture, pipeline inspection and Hollywood film-making, scores of hobbyists are buying drones at local stores or online and taking to the skies with a passion.
NASA is working with the drone industry and the FAA to forge a new low-altitude air traffic control system specifically for drones. It’s the rise of a new subculture, spelling big future profits for AeroVironment.
The average analyst expectation is for AVAV to rack up year-over-year earnings growth of 41.9% next year. The company falls just beneath the outer limit of being a small cap, which affords it greater growth potential than its mega-cap rivals such as Lockheed Martin (NYSE: LMT). As the pandemic-era economic recovery picks up steam, small-caps should enjoy rapid growth.
I also like the fact that, unlike many other tech innovators, AVAV has a solid balance sheet. Cash on hand totals $373 million, versus debt of only $12.8 million (most recent quarter).
AVAV occupies the nexus of the aerospace and technology sectors. Looking for a tech-oriented stock that won’t crash and burn? Now’s the time to strike. AVAV belongs in any portfolio.
PS: Some technology stocks, such as AeroVironment, are smart buys now. But many others aren’t. My colleague Jim Pearce, chief investment strategist of Mayhem Trader, has pinpointed a coterie of highly vulnerable tech stocks that face a day of reckoning. If you want to reap a windfall from their imminent decline, click here for details.
John Persinos is the editorial director of Investing Daily. He also serves as an analyst with the aerospace/defense consulting firm, Teal Group. You can reach John at: mailbag@investingdaily.com. To subscribe to his video channel, follow this link.