Tech stocks get a lot of the plaudits from growth investors, but we've seen in recent years you can find oversized returns in many sectors of the economy.
For most of the last century stocks of companies that work to get you from point A to point B were in the stodgy, slow-growth category, but times change. In 2020 we saw electric vehicle companies and their suppliers shoot higher, and companies that want to get cargo and people to space have been front of mind so far in 2021. Meanwhile, an old standby, airline stocks, are beaten down from the pandemic and have the potential to gain altitude in the quarters to come.
Those are three very different types of stocks, with different risks and different potential rewards. Which subsector offers the best options for investors?
Here, three Fool.com contributors discuss whether air travel stocks, electric vehicle stocks, and space stocks are good choices for investment dollars today.
The safest bet to fly higher
Lou Whiteman (Delta Air Lines): The idea of an automotive revolution is exciting, and space certainly captures the imagination and offers great potential. But Wall Street in the last year has enthusiastically pushed both sectors higher. High valuations coupled with the risk of early-stage businesses gives me caution. For my money, air travel stocks are the better bet.
Airline stocks were crushed in the early days of the pandemic, and the industry has experienced severe revenue declines that pushed them into the red for much of 2020. They still haven't recovered, and some airlines have warned it could be years before business travel comes back.
Still, the long-term trend toward growth in air travel demand remains unchanged. The International Air Transport Association forecasts total global travel demand to grow from 3.9 billion passengers in 2019 to 8 billion by 2039.
U.S. airlines have the cash they need to ride out the crisis, and with the vaccine rollout under way the worst should be behind them. Investors interested in buying in now and riding out the turbulence should stick to top operators or airlines with competitive advantages that make them well suited for this environment. Spirit Airlines (SAVE 1.44%), due to its industry-low costs and focus on the leisure customer, is an intriguing pick to be the first to fully recover. Southwest Airlines (LUV -0.75%), meanwhile, has the industry's best balance sheet and a history of going on the offensive during periods of weakness.
But my choice is Delta Air Lines (DAL 0.48%), which for me is a better long-term investment than Spirit and, trading at barely one times forward sales, a bargain compared to Southwest's two times multiple.
Prior to the crisis Delta was an innovator, the first so-called legacy carrier to figure out how to compete, and win, against discounters. It continues to fly its own path, trying to differentiate itself with customers by keeping middle seats blocked long after others have begun to fill flights. And management in January provided an upbeat forecast for 2021, calling it "a year of recovery."
Airlines aren't as exciting as space travel or electric vehicles, but their path forward is much clearer than either of those still-speculative sectors. Given how cheap the stocks are right now, it's a great time to invest in aviation.
Electric-vehicle stocks have been hot, but...
John Rosevear (NIO): On the one hand, electric vehicle stocks have been hot hot hot! On the other hand, they've been hot for long enough that many of these companies' valuations have surpassed any realistic (or even unrealistic) expectation of their future prospects.
Consider NIO (NIO 5.43%), which is sporting a market cap of about $94 billion as I write this. NIO sold 43,728 vehicles in 2020. While there's a good chance that it could double that total this year, and that kind of growth deserves a strong multiple, it's not clear that NIO has a long-term path to more than 2 million or so vehicles a year.
Is that really worth $94 billion today? Even if it is, how much more upside is there?
Or consider Lordstown Motors (RIDE 2.34%), which isn't even shipping its electric Endurance pickup yet and has a market cap around $5 billion. Sure, it could do well, but its truck is a huge underdog to Ford Motor Company's (F 0.98%) electric F-150, which is now due in the first quarter of 2022.
Lordstown's Endurance will find buyers, but realistically, its addressable market -- fleet customers willing to take a chance on a new company -- is pretty limited. I expect most fleet customers who have been buying Fords for years to choose Ford's electric truck instead. (Likewise Tesla's (TSLA 0.12%) CyberTruck, by the way. Don't expect big sales for that one.)
By the way, Ford, which sold 4.2 million vehicles last year, has a market cap of around $46 billion -- half of NIO's. (I should mention that I like NIO's business plan, management team, and recent execution. It's a good company!)
Yes, it's worth paying up for growth. And in an environment where real yields on many bonds are negative and lots of companies have trimmed or suspended dividends, it's no surprise that investors scrounging for returns have piled into highly speculative stocks like these EV names.
But those growth expectations have to be realistic. And the reality is that the auto business is a tough, high-fixed-cost, low-margin, brutally competitive business dominated by a few global giants -- and that's likely to remain true once most of our vehicles are powered by batteries rather than gasoline.
A few of these recent entrants (I include Tesla on that list) will likely survive and thrive. But the long history of the auto business suggests strongly that most won't. Invest carefully.
Have space stock, will travel
Rich Smith (Stable Road Acquisition Company): I grew up on Robert A. Heinlein novels, so if you ask what kind of stock I'd like to buy now, you know I'm going to answer "space."
Go ahead. Call me a space cadet, but when I'm investing my "fun money" -- money that I can afford to lose (although of course I hope I'll win) -- it's going into one of the new breed of space stocks that have IPO'd in SPAC-sponsored reverse mergers.
But which specific space stock? Will it be:
- Virgin Galactic (SPCE 4.40%), the first of the Space SPACs, and the stock that sparked the trend of going public via SPAC with its successful reverse-merger IPO back in 2019?
- Or New Providence Acquisition (NPA) perhaps, Citron Research's new favorite space stock, which plans to bring satellite telephony company AST SpaceMobile public?
- Or maybe Holicity (HOL)? Later this year, Holicity will bring public a small rocket manufacturer -- Astra -- making it instantly the only pure play on small rocket launch that ordinary investors can buy.
Actually, while each of these space stocks has its attractions, I've chosen instead to invest in Stable Road Acquisition (SRAC), which is bringing space tug company Momentus public later this quarter.
Now, is Stable Road/Momentus a better business than the other three space SPACs? That's hard to say. None of these companies are profitable right now. Most have no revenue to speak of. Momentus, however, has allied itself with space stalwart SpaceX to provide a crucial "last-mile" service, delivering to their proper orbits satellites launched en masse on Falcon 9 rockets. It seems to me, therefore, that if SpaceX does well, Momentus should also do well.
It's precisely because SpaceX is doing very well that Momentus -- Stable Road -- is my favorite stock in space.