If you have been reading Market Musings for the last week or so, you will know that I am uncharacteristically pessimistic right now. The overall market looks somewhat overbought and the very real problems in both high yield and many overseas markets are likely to dominate the conversation as the year draws to a close and into early in the first quarter of next year. That makes it difficult to find things to invest in.
Usually, when looking for stocks that are likely to perform well in even a somewhat top heavy market there are two avenues to follow. You can be defensive and look for undervalued stock that will fall less than others in the event that you are right and the market drops, or you can seek a stock in a company whose story is so compelling that appreciation is likely even in a down market. I come from a dealing room background, and so by inclination and training the latter course has more appeal.
The problem is that that potential usually comes with a healthy dose of risk, and when markets are nervous risk assets fall fast and early. That is why, when you find a 3 month chart that looks like this in comparison the S&P 500, which has been just about flat in that time, it has to be of interest.
The orange line on the chart above represents stock in AeroVironment (AVAV). This California-based tech company is best known as a leader in the field of drones, or Unmanned Aerial Vehicles (UAVs), but that is not their sole focus. They are also a big player in electric vehicle (EV) charging stations. This strong presence in two very different growth areas makes for some interesting diversification.
The drone business looks set to keep expanding on both the military and civilian sides. Recent terror attacks have brought into sharp focus the need to combat radical groups in the Middle East, but, despite the rhetoric of some Presidential primary candidates, America and its allies are war-weary nations. The current administration and, more importantly given that next year is an election year, the military establishment, see drone attacks as the best option to take the fight to ISIS without risking the lives of thousands of troops.
Civilian uses for AEVs, meanwhile, are still being explored, most notably by Amazon (AMZN) and Google (GOOG), or should I say Alphabet? The Civil Aviation Authority seems to be coming to grips with the drone issue and formulating regulations that will allow the drone business to grow while still guarding against some of the privacy and safety concerns. That process will probably be slow, but when consensus is reached, the potential for AEVs is obvious.
Even that two pronged growth story, however, may pale in comparison to AVAV’s other area of interest, EV charging stations. The agreement reached at the Paris environmental summit shows once again that while America has a small but extremely vocal group of climate change deniers, the rest of the world sees it as a real problem, and is prepared to put resources behind alternatives to fossil fuels.
EVs may not end up being the long-term solution to low emission transportation, as generating the electricity currently has its own carbon problems, but for now they are seen as the best alternative to gas powered vehicles. The reality, whatever your views on the subject, is that there is money to be made, and AVAV is positioned to benefit.
By conventional metrics, AVAV can hardly be described as value with a forward P/E approaching 100, but that is not the point. If, as I expect, next year is going to be one where investors begin to focus once again on return of capital as much as return on capital, then growth in stocks will be hard to come by. AVAV, as a leader in two rapidly expanding industries, represents one of the best bets to achieve that growth, regardless of what the broader market does.