Sifting Through the Hype to Find Stocks That Might Be Beneficiaries Of Military Drone Demand [GeoWire Weekly No. 168]

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Highlights Focus on substance over hype: Deep Sail Capital’s reminder to distinguish between genuine companies and “wannabes” riding hot trends perfectly aligns with our stock-picking approach. Examples like QUBT highlight the risks of chasing hype without assessing fundamentals. Finding quality winners among trends: While hot trends often come with hype, we focus on identifying high-quality companies early, avoiding the noise and delivering results like 25 multibaggers from our trend-based screens. Exploring profitable opportunities in the drone trend: While hype surrounds the drone industry, we’re vetting a profitable defense supplier with strong government ties, to assess its potential fit in this emerging market before any formal announcements. Drone industry poised for strong growth: Valued at $64.32 billion in 2023, the global drone market is expected to grow to $157.98 billion by 2030. Preliminary drone screen output: Our initial screen identified 60 potential drone-related stocks under $2 billion in market cap and over 200 when broadening the criteria—laying the groundwork for detailed due diligence.

Our team enjoys gathering investing insights from our most trusted and favorite peers. 

One of those peers is Deep Sail Capital, a respected hedge fund manager with over 50,000 TwitterX followers. 

We’ve had the privilege of interviewing the founder of the fund twice (9/17/2024, 8/1/2023), and his insights often get us thinking. 

A recent tweet from Deep Sail’s founder struck a chord with us. It’s a powerful reminder about how hot investment trends can lure in both winners and “wannabes.” Here’s the tweet that got us thinking:

“In the recent Quantum, AI, and automation bubble it’s important to distinguish between real companies that will have a real future and companies trying to ride the coat tails of the trend. Both groups will trade together going up, but the shitcos will never recover after peaking.”

This  perfectly aligns with how we’ve approached stock picking over the years—focusing on substance over hype.

For example, investors too often end up chasing stocks like Quantum Computing Inc. (NASDAQ:QUBT) (because of the name) before looking under the hood. Doing so shows a company with only $300,000 in revenue through the first nine months of 2024, losing $17 million! The stock now has a market cap of $1.82 billion, after having risen over 7000% from its 52-week low of $0.35 on quantum computing hype. 

This is probably one of the “coattail” stocks that Deep Sail Capital was referencing.

Finding Quality Winners Among Emerging Trends Is Possible

While we realize hot trends can be full of hype, we believe it’s a colossal mistake to ignore trends that can benefit high quality, legitimate companies.

Continuing on my rant about overuse of Buffettisms…

“Don’t invest in hot or sexy trends” is one of the most ridiculous statements an investor can make.

Furthermore, sexy markets can transform boring companies. Case study? Sure, Tss, Inc. (NASDAQ:TSSI).

Yes! Don’t invest in obvious pump &…

— Maj Soueidan (@majgeoinvesting) December 5, 2024

We think we’ve done a pretty good job for our subscribers in identifying quality companies that could be early participants in emerging trends. As a result, our subscribers don’t have to waste time with the hype. 

For example, over the years, we’ve created four screens to capitalize on industry or market trends. So far, these screens have produced 25 multibaggers.

Here are a few highlights on how we find quality performers among trends: 

• Tss, Inc. (NASDAQ:TSSI) (Data Centers): As most microcap data center stocks ride the hype train, we zeroed in on TSSI—a data center technology integrator with strong fundamentals and a unique position in its industry (Dell Technologies Inc. (NYSE:DELL) partner). The result? TSSI has delivered a return of 4711% this year.
• Lifevantage Corporation (NASDAQ:LFVN) (GLP-1): Our team is required to pick their favorite sources of information to spot emerging trends, so we can discuss findings as a group. Our understanding of the GLP-1 weight loss space (Think Ozempic) started when one of our team members caught a key insight on a Wall Street Journal podcast. That insight, combined with our in-house research on LFVN, led us to take early action on how to find news that showed that the company was about to launch its own natural GLP-1 weight loss management solution. The stock has delivered a return of 246.3% since we unwrapped our findings for our subscribers.
• Koil Energy Solutions, Inc. (OTCQB:KLNG) (Subsea Technology): Subsea technology has quietly emerged as a key area of growth as nations and certain industries are increasing the money they spend to improve the infrastructure and monitoring technology under oceans and seas. Our team’s consistent attention to industry whispers led us to KLNG, a company that’s been quietly making “waves” in this space. KLNG has delivered a return of 42.3% in 4 months, after we added the stock to our high conviction Model Portfolio.

What’s the common thread in all of this? Keeping an open mind in order to perform the due diligence to connect the dots before the rest of the market catches on. This is the essence of what we call Information Arbitrage—our ability to identify and act on under-the-radar information disconnects before the crowd figures it out.

A baffling theme that I have encountered throughout my three decades of investing and what is particularly amazing is that, for some reason, most investors tend to initially focus on the lower quality pump and dump trend stocks, while ignoring the quality companies that are going to actually benefit from trends. We love having that “time arbitrage.”

What’s Next? Our Eyes Are on Drones

The next trend we’re actively investigating is the drone industry. Drones are hot right now. The hype around drones has been exacerbated by Donald Trump Jr., who recently joined the advisory board of Unusual Machines (NYSE AMEX:UMAC), a U.S.-based drone and drone components manufacturer, now up over 1000% since October 31, 2024.

The hype was furthered by drone sightings in New Jersey over the past month.

Red Cat Holdings, Inc. (NASDAQ:RCAT) is another drone stock, up 1342% this year. But, like most of their drone “peers,” their financials tell a different story with no profits to back it up and declining sales, although the company recently won a contract that investors are excited about. It remains to be seen if they will make money on this contract.

That’s why we’re going deeper. We’re currently vetting a company in the defense industry that we believe may be uniquely positioned to benefit from the drone emergence by beginning to market existing technologies into the industry. 

While it’s still too early for us to determine if this company will target the drone market, we know the company well, because it’s already part of our Coverage Universe. Our preliminary research indicates that their products could clearly be a good fit within the commercial/military drone industry ecosystem.

And that’s what we love here. We could potentially figure things out before the company might actually come out and announce their participation in the drone market, maybe through a nice government contract. The Company’s SEC filings don’t even mention drones as a potential target market!

This isn’t a “fly-by-night” operation—it’s a business with strong, profitable operations, a solid backlog of contracts, an established relationship with the defense industry, and a ~40 year operating history.

We believe its relationship with the United States government could give it an edge as drones become a more critical component of modern defense strategies. 

What follows is a first look at the company’s products in terms of how some might be a good candidate to target the drone industry.

Drone Industry Growth

The drone industry is experiencing significant growth. The global drone market was valued at approximately USD 64.32 billion in 2023, and is expected to grow at a compound annual growth rate (CAGR) of 14.5% from 2024 to 2030, reaching an estimated USD 157.98 billion by 2030.  (Grand View Research)

The commercial drone segment is anticipated to witness significant growth, with projections indicating a CAGR of 22.3% from 2024 to 2034, reaching approximately USD 223.66 billion by 2034.

We know this trend, apart from benefitting actual drone companies, opens avenues for companies specializing in military-grade optics, communication systems, high-resolution cameras, advanced sensors, propulsion systems, navigation equipment, and other critical technologies in an evolving defense landscape.

As a matter of fact, we have seen this evolution first-hand in Ukraine’s bid to defend themselves against Russia using some of the most advanced and coordinated battlefield drone strategies seen in modern warfare, from all-out unmanned coordinated assaults hundreds of miles into Russian territory, to missions designed to remotely engage with field combatants on the other side of the gun. At the end of the day, drones are relatively inexpensive for the military, making them logically expandable in the context of warfare.

Preliminary Drone Screen Output

So we ran our own screen to find companies that have documentation indicating either direct or adjacent involvement with drones. We identified 60 stocks with market caps under $2 billion, prices under $30 and under 100 million shares outstanding, and over 200 stocks when we cast a wider net.

We still have to go through each stock one by one to make sure that we’re on the right track, but it’s a good start. Let the due diligence begin…

~Maj Soueidan

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The post Sifting Through the Hype to Find Stocks That Might Be Beneficiaries Of Military Drone Demand [GeoWire Weekly No. 168] appeared first on GeoInvesting.

Source: https://geoinvesting.com/will-this-stock-be-a-downstream-beneficiary-of-military-drone-demand/