Hello, one and all … I took a little longer to recuperate from my fundraising bike ride than anticipated, but I’m back, hale and hearty and ready to steer the Thinkolator toward some mysterious teaser stocks.
The one that pops to the top of the list for us today is pitched by Michael Robinson in ads for his Nova-X Report, which is his “entry level” growth/tech stock newsletter.
The order form sums up the story nicely:
“YOU CAN HELP AMERICA WIN THE HYPERSONIC ARMS RACE
“And Turn Our Nation’s ‘Number One Defense Priority’ into $38,770 in Fast Profits!”
… and continues…
“Whoever controls Hypersonic technology… controls the world.
“The total cash pouring into Hypersonics will be in the trillions!
“And amazingly, at the center of all this is the tiny Alabama defense contractor that’s developing the engines and components for this Hypersonic revolution.
“This company has $67.6 billion racked up in new contracts right now.”
So the ad is mostly a long pitch about hypersonic breakthroughs — developing engines, primarily for missiles, that will reach Mach 5 and beyond, making conventional ICBMs and nuclear missiles appear pretty obsolete… and making for a weapon that’s currently indefensible.
This is something that has been a R&D priority for most of the major space-going nations for years, so part of the fear is that Russia and China, both of which are also very active in developing hypersonic capabilities, will beat the US when it comes to developing hypersonic weapons.
And, of course, we’re expected to get rich from investing in this “tiny Alabama defense tech company” — so let’s dig through the clues and see if we can identify which stock Robinson is talking about.
“Surprisingly, at the center of Operation Hyper-X – at the center of this revolutionary technology itself – is a tiny Alabama defense tech company most people have never heard of.
“This tiny company has been quietly ramping up this technology.
“It sits in the middle of rural Virginia, about 88 miles southwest of Washington D.C.” ….
“I recently learned that $11 million was just spent to expand the facility.
“So this outfit out of Alabama can get their game-changing engines rolled out faster.
“Their technology is about to bring the U.S. back to military greatness, locking in America as the world’s most advanced military superpower today, tomorrow, and possibly forever.”
So that’s not a lot of clues, but I did sift through the ad and feed what I found into the Thinkolator — I won’t make you sit through the whole foofaraw, but can jus tell you what the Thinkolator came up with after a bit of chewing: This is almost certainly Aerojet Rocketdyne (AJRD).
Aerojet and Rocketdyne are both California aerospace companies that were merged together a few years ago, they are specialists in propulsion and were both part of the cold war defense buildup and the space race over the past 75 years… so what’s this Alabama business?
Well, Huntsville is, for both cost and political reasons, now the center of rocket development for NASA, and Aerojet Rocketdyne is in the process of moving most of their defense-related work to Alabama — though they’ll continue to have a large presence outside Sacramento, and they do have locations around the country.
That $11 million facility expansion in Virginia is in Orange, and it was announced a few years ago, and Aerojet Rocketdyne does work with pretty much all the big defense and space contractors. They are not the only rocket engine company out there, and not every large contractor relies completely on Aerojet Rocketdyne for their rocket engine technology, but from what I can tell they seem to be the strongest “pure play” in the US.
And the other clues do match, at least roughly — including a hint that they had revenue of about $1.7 billion last year, and that they are roughly a $2 billion company (though after a very strong earnings report, they’re closing in on $3 billion).
Aerojet had a pretty quiet year until this quarter, with a couple disappointments along the way and even an accusation of accounting shenanigans from a short seller, but there’s been some more optimism recently — both because of the talked up “Space Force” that President Trump wants to develop, which would likely increase the number of rocket engines needed and increase military and space funding in general, and because AJRD finally had a really strong blowout quarterly earnings report about ten days ago, driving the shares up close to 20%.
As it was back in October when I last looked at the stock, Aerojet Rocketdyne is probably a reasonable bet for those looking to play higher defense and space spending, though, like it was a year ago, it’s on the expensive side and trades at a pretty substantial premium to the larger defense industry players like Boeing (BA), Northrop Grumman (NOC), Lockheed Martin (LMT) or Raytheon (RTN). AJRD has roughly doubled since the 2016 election, making it one of the stronger defense industry stocks during that time — of those big four players, only Boeing has outpaced Aerojet’s near 100% gain (most of the others have pretty closely tracked the S&P 500’s ~30% gain).
I don’t have any great insight into hypersonic flight, though it’s a fascinating technology — and a frightening one on a military level, which has been discussed in arms control circles for several years (the US, Russia and China are widely thought to be at risk of causing a massive hypersonic arms race, and there had been hopes a few years ago that it could be stopped with some early testing bans between those three countries — but given the current diplomatic climate, that doesn’t seem particularly likely).
There are clearly some growing expectations build into Aerojet Rocketdyne shares right now, so there’s some risk if the valuation comes back down… and these smaller defense contractors are always at risk for “lumpy” earnings as huge projects wax and wane… but it’s an interesting little supplier with some serious history in the aerospace industry, with strong technology and participation in many of the more important missile and engine-related projects that the government is funding now — including the still pretty small hypersonic R&D business.
I’m sure you could do worse… it’s not going in my portfolio at the moment, and they’re not going to have $60 billion in revenue anytime soon or turn your $1,000 into $38,700 in short order, as Robinson implies, but I expect they’ll do well as defense budgets continue to grow, and they’re also small enough to be acquired by one of the bigger defense firms if any of them decide to look for a rocketry edge. I don’t know if Glasshouse was correct in their recent claims that AJRD was getting frisky with its accounting, so that’s a possible risk as well.
So with that, dear readers, I’ll leave you to your cogitation — think AJRD fits in your portfolio? Looking deep into the future for the first hypersonic flight to get you to London in an hour? Think this is all boloney? Let us know with a comment below… thanks for reading!
There are only a few days left in our Charitable Membership drive -- Help Stock Gumshoe, help a great cause! If you've ever thought about joining us, now is a great time... just click here for the details.