Collapse of space stocks highlights risks of theme investing

As the tech bubble reached its peak in 2021 space-themed stocks were headline news as billionaire entrepreneurs Richard Branson and Jeff Bezos teased investor imaginations with their high profile sub-orbital launches.

Three years later most investors are probably sorry they paid attention. Two Canadian exchange traded funds launched within weeks of each in April 2021, no longer trade. A third marketed by New York-based Ark Investment Management LLC, is still standing, but trades at just two-thirds if its 2021 issue price.

The spectacular explosion of the Elon Musk’s SpaceX’s rocket minutes after launch on Apr. 20 was a reminder of the risks of space travel. A week  later Japan’s ispace Inc. failed in its attempt to make the first private moon landing. Its lander unexpectedly accelerated and probably crashed.

The incidents brought home the technical challenges involved for the industry, the enormous financial risks and uncertainty and the cost of failure. They follow the collapse of Richard Branson’s Virgin Orbital Holdings Inc. in early April. Virgin Orbital planned smaller scale rocket launches than SpaceX and filed for bankruptcy Apr. 4, two years after a US $3.7 billion initial public offering.

Branson’s Virgin Galactic Inc. (NYSE:SPCE) is barely hanging on, with the shares having lost 94 per cent of their value since early 2021.

The collapse of the space ETFs highlights the perils of fad and theme investing. Themes tend to focus on new ideas that might hold promise but are unproven. They often involve smaller, growth-oriented companies. Investors pile in when the theme receives the most media coverage, which is when prices are about to peak.

“Investing based on a theme or a sector makes you more likely to be caught in herd mentality or hype,” says Coreen Sol, senior portfolio manager with Solinvest Portfolio Management at CIBC Wood Gundy in Vancouver.

Ms. Sol says investment themes introduce bias by narrowing the available pool of stock choice. Stocks are screened less on merit and more because they fit the theme.

She is the author of Unbiased Investor: Reduce Financial Stress and Keep More of Your Money. The book offers strategies to help investors guard against common errors in judgment, one of which is behavioral bias.

Despite the spate of bad news, analysts say there is opportunity. While space travel has the sex appeal it had no real business for now. Satellites, the rockets to launch them and command and control systems are a better bet.

Satellite demand is being driven in part by the replacement of military and civilian devices launched as far back as the 1960s. There are new demands for cyber security and military use and in the civilian orbit, increasing need for internet and 5G communications.

“Satellite costs have declined because of lower launch costs and reusable rockets,” says Rene Reyna, head of thematic and specialty product strategy at Atlanta-based Invesco Ltd. “That’s  going to continue to evolve and [for investors] you end up in the aerospace and defence arena.”

Space-related contracts play to the core competencies of defence contractors who have the size and scale to build complicated and expensive systems.  They also have well developed relationships with governments and space agencies.

The U.S. Space Force, formed in 2019 as the space-focused arm of the U.S. Armed Forces has been one catalyst. NASA, the U.S. space agency, is sub-contracting construction and sub-systems. Civilian telecom companies are another source of business.

Northrup Grumman Corp. (NYSE:NOC) is developing a space logistics business including a module that will stay in orbit and repair satellites. As more satellites are launched, repairing them is becoming a priority.  

Raytheon Technologies Corp. (NYSE: RTX) makes satellite command-and-control systems, as well as spacecraft components. NASA’s Mars Rover used Raytheon’s optical systems to view the landscape as it moves. A Raytheon assembly within the Rover serves up the drill bits it uses to mine the surface.

Canada’s MDA Ltd. (TSX:MDA) MDA is a leading supplier of satellite systems, robotics, and components for both the legacy and emerging space markets with its flagship Canadarm. RBC Capital markets analyst Ken Herbert said in a research note he believes MDA is set to outperform this year.

Mr. Reyna oversees the Invesco Aerospace and Defence ETF  (NYSAEarca:PPA) which holds many of these companies. He says they offer stability and growth over time because  “the U.S. defence budget is substantial and grows just about every year.”

In the meantime, pure-play space ETFs have crash landed. Emerge Canada Inc. launched a Canadian version of the ARK Space Exploration & Innovation ETF (NYSEarca: ARKX) sub-advised by Cathie Wood’s team.

 In mid-April Emerge’s funds were placed under a cease trading order.  At that point, the Emerge Ark Space Exploration ETF (EAXP:NEO) was 33 per cent below its 2021 issue price, mirroring the parent fund’s decline. On May 11, The Ontario Securities Commission suspended Emerge Canada’s registration Inc. for capital deficiency.

Oakville’s Harvest Portfolios Group Ltd. launched a space innovation fund in April 2021 and closed it a year later. It had fallen 28 per cent in the 12 months after launch.

For investors, the new space race has truly been an expensive out-of- this world experience.

This article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on May 4, 2023. For reprint information please view this page.