In this article, we will look at the 10 Worst Aerospace Stocks To Buy According to Short Sellers. Let’s look at where HEICO Corp (HEI) 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).
10 Worst Aerospace Stocks To Buy According to Short Sellers
HEICO Corp (NYSE:HEI)
Short % of Float: 4.26%
Number of Hedge Fund Holders: 53
HEICO Corp (NYSE:HEI) manufactures jet engines and aircraft component replacement parts. It operates in two segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG). The FSG Segment repairs, overhauls, and distributes aircraft and jet engine components, instruments, and avionics for aircraft repair companies, domestic and foreign commercial air carriers, and military and business aircraft operators. It comprises the HEICO Aerospace Holdings Corp. and HEICO Flight Support Corp., along with their subsidiaries.
The company’s ETG segment comprises HEICO Electronics Technologies Corp and its subsidiaries. It manufactures, designs, and sells several kinds of data and microwave, electronic, and electro-optical products, including laser rangefinder receivers, infrared simulation and test equipment, backup power supplies, and electrical power supplies.
HEICO Corp (NYSE:HEI) is running on solid fundamentals. Its net sales and consolidated operating income produced record results in Q2 2024, improving by 39% and 33%, respectively, compared to Q2 2023. This growth was primarily due to a 21% increase in organic net sales growth in the Flight Support aftermarket replacement parts. The Flight Support Group’s net sales reached a record $647.2 million in the quarter, experiencing a 65% increase. Other factors supporting this growth include improved results at ETG, the impacts of profitable fiscal 2023 and 2024 acquisitions, and strong organic growth.
The company’s investment in Wencor is proving profitable. HEICO and Wencor’s high-quality products hold a competitive advantage in the market. HEICO Corp (NYSE:HEI) expects a continuation of net sales growth in ETG and FSH in the second half of 2024. This growth will primarily be driven by a strong demand for the company’s products and contributions from its fiscal 2023 and 2024 acquisitions.
ETG is specifically in a solid position to expand and grow its net sales of defense-related products in the second half of 2024, supported by a strong backlog. The company is increasingly developing new products and services to further improve profitability, ensuring commitment to further market penetration while maintaining its flexibility and financial strength.
Alger Small Cap Growth Fund stated the following regarding HEICO Corporation (NYSE:HEI) in its Q2 2024 investor letter:
“HEICO Corporation (NYSE:HEI) is a leading manufacturer of Federal Aviation Administration (FAA) approved jet engine and aircraft component replacement parts. We believe the company is well-positioned to benefit from the steady aging of the global commercial aerospace fleet, resulting in increased consumption of aftermarket parts. Additionally, ongoing production issues from two major aircraft manufacturers have reduced the projected new plane deliveries, further supporting our view that the average age of the global fleet is likely to remain elevated over the next few years. During the quarter, HEICO’s shares contributed to performance, where the company delivered strong quarterly results with revenues and earnings beating analyst estimates along with continued execution on strategic tuck-in mergers and acquisitions.”
Overall, HEI ranks 8th among the 10 worst aerospace stocks to buy now according to short sellers. While we acknowledge the potential of HEI 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 HEI 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.
