In this article, we will look at the 10 Worst Aerospace Stocks To Buy According to Short Sellers.
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.
With these trends in view, let’s look at the 10 worst aerospace stocks to buy according to short sellers.
10 Worst Aerospace Stocks To Buy According to Short Sellers
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).
10 Worst Aerospace Stocks To Buy According to Short Sellers
10. Eve Holding Inc (NYSE:EVEX)
Short % of Float: 3.33%
Number of Hedge Fund Holders: 5
Eve Holding (NYSE:EVEX) is an aerospace company that develops Urban Air Mobility (UAM) solutions and operates in Florida, Melbourne, and Brazil. Its operations cover the design and production of electric vertical takeoff and landing vehicles (eVTOLs) and the new Urban Air Traffic Management system. This system allows eVTOLs to operate in dense airspace along with conventional aircraft and drones. The company is also engaged in a portfolio of company and third-party eVTOL support and maintenance services. These include material services, technical support, maintenance, ground handling, training, and data services.
Eve Holding (NYSE:EVEX) markets its eVTOLs to UAM services operators, including helicopter and fixed-wing operators and lessors that purchase and manage aircraft on behalf of operators. It also engages with ridesharing platform operators to secure committed operation hours for its eVTOLs. Since the company is pre-operationally developing its eVTOL and ecosystem, its financials primarily reflect the costs associated with program development.
It is, however, making quick strides in the field. It had a successful first half of 2024, naming several achievements. The most significant was the quick base advancement in assembling its full-scale prototype. This operation is working right on schedule. The company is also developing a solid network of partners in domains like energy and infrastructure to address the most significant challenge ahead of Urban Air Mobility: creating a whole new ecosystem instead of simply developing aircraft.
Eve Holding (NYSE:EVEX) also emphasizes proper maintenance and support to provide best-in-class services to eVTOL’s operators. It has secured contracts with 12 different customers for maintenance, repair, and overhaul (MRO). This initiative is expected to bring up to $935 million in revenue to the company in five to ten years. Since these customers have placed LOIs for around 1,000 of Eve’s aircraft (which makes up 35% of its order book), it can potentially expand the business within its customer base. Eve Holdings (NYSE:EVEX) takes the tenth spot on our list of the 10 worst aerospace stocks to buy according to short sellers.
9. Sky Harbour Group Corporation (NYSE:SKYH)
Short % of Float: 3.76%
Number of Hedge Fund Holders: 4
Sky Harbour Group (NYSE:SKYH) is an aviation infrastructure company that develops a nationwide network of home-basing solutions for business aircraft. It develops, leases, and manages general aviation hangars throughout the US. The company’s home-basing offering provides private and corporate costumes with the physical infrastructure in business aviation and personalized service to based aircraft.
The home-basing hangar campuses provide a portfolio of services and features. These include line crew and services exclusively for tenants, private hangar space for exclusive use, adjoining office suits and configurable lounge, climate control to manage condensation and associated corrosion, no-foam fire suppression, and several others. They also provide control access and monitor hangar space.
The company’s harbor construction activity picked up speed in Q2 and is expected to continue accelerating with an increased focus on construction. Its revenue grew in Q2 2024. This was primarily because of certain tenant leases that kicked in during Q2, wlong with the benefits of some tenant renewals of its first lease expirations and some tenant replacements, both at higher rental rates.
Sky Harbor (NYSE:SKYH) is undertaking a new development phase and construction of its accelerated growth plan. It is starting with three projects that are currently in progress and on track. They are somewhat even ahead of schedule and are expected to be wrapped by Q1 fiscal 2025. The growth plans will continue in 2025 and 2026.
The company is expected to start constructing eight projects and finish three in 2025, bringing the total to 11. Similarly, 2026 is expected to see the start of 15 projects and the completion of 7, with the total count reaching 22. Its accelerated growth plan of 33 projects between 2025 and 2026 thus gives it an attractive appeal.
Sky Harbor’s (NYSE:SKYH) intentions to continue accelerating on-site acquisition give it a competitive market edge, as it is on the path to securing the resources to grow. The company ranks ninth on our list of the top worst aerospace stocks to buy according to short sellers.
