In this article, we will look at the 10 Worst Aerospace Stocks To Buy According to Short Sellers. Let’s look at where VSE Corporation (VSEC) 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).
VSE Corporation (NASDAQ:VSEC)
Short % of Float: 7.68%
Number of Hedge Fund Holders: 14
VSE Corporation (NASDAQ:VSEC) provides aftermarket maintenance and distribution, repair, and overhaul (MRO) services for government and commercial markets for air and land transportation assets. Its Aviation segment provides MRO services and aftermarket parts distribution and engine accessories that support business, commercial, and general aviation operators. It also offers an array of services to an elaborate global client base comprising MRO integrators and providers, commercial airlines, regional airlines, aviation manufacturers, cargo transporters, corporate and private aircraft owners, and fixed-based operators.
The company’s Aviation Commerical market is seeing positive results. Global airline passenger traffic is on the path to recovery, returning to, and in many cases even exceeding, record prepandemic levels. Revenue passenger miles for 2024 are expected to be around 4% higher than 2019 levels, with a continental annual increase expected over the next decade. Its global in-service fleet is also expected to expand by around 3% annually to accommodate increasing passenger demand.
The company is scaling its new European distribution Center of Excellence in Hamburg, Germany, which was launched earlier in 2024. The Center presently supports its Pratt & Whitney Canada aftermarket program, and will support additional distribution products, including tires, batteries, and tubes, from its Desser acquisition later in 2024. In addition, the company’s launch of the new OEM-licensed Fuel Control Manufacturing program is exceeding early expectations, supporting segment profitability. Its Kansas facility expansion is set to support the manufacturing of this new product line and will be operational by the end of 2024.
VSE Corp (NASDAQ:VSEC) is thus running on a strong operational model. It is building a core competency in acquisition integration, with its Desser acquisition expected to be completed in the coming months. This integration will be supported by its new e-commerce site that will also support all Aviation and legacy Desser customers. The new VSE Aviation site is expected to be launched in Q3 2024. The company’s recent acquisition of Turbine Controls is also exceeding initial expectations. VSE Corp’s initial focus for this business is to add capacity and increase its scope with existing engine OEM partners.
Overall, VSEC ranks 6th among the 10 worst aerospace stocks to buy now according to short sellers. While we acknowledge the potential of VSEC 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 VSEC 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.
