Virgin Galactic’s VSS Unity launched into space from New Mexico in May.
Courtesy of Virgin Galactic
Buy and hold doesn’t seem to work in space. Stocks such as Virgin Galactic Holdings are just too volatile. Investors need to realize that some space stocks trade more like biotech stocks than traditional aerospace and defense shares.
Virgin Galactic stock (ticker: SPCE) traded between $15 to more than $55 between May and June. When shares were $15, Wall Street was pounding the table, telling clients to Buy. Now that the stock is around $45, analysts sound more cautious.
On Tuesday, UBS analyst Myles Walton downgraded Virgin Galactic stock to Hold from Buy, even while increasing his price target on shares to $45 from $36. Despite the downgrade, shares were up 8.3%, at $48.69, in recent trading, showing again that, for now, traditional rules for aerospace stocks don’t apply to Virgin Galactic, at least not yet.
The downgrade is simply about valuation. “With the stock up nearly 3x from its lows just over a month ago, we are moving to [Hold],” wrote the analyst. Walton values Virgin Galactic stock at 47 times estimated 2025 Ebitda, short for earnings before interest, taxes, depreciation, and amortization. He takes that 2025 price and discounts it back at 15% a year to reach a fair price for 2021.
The S&P 500 trades for about 15 times estimated 2021 Ebitda. But Virgin Galactic is expected to grow much faster than the average stock.
Walton isn’t the first or even the second analyst to downgrade shares after the epic stock run. BofA Securities analyst Ronald Epstein downgraded shares to Sell from Buy on June 30. Before that, Alembic Global Advisors analyst Peter Skibitski cut his rating to Hold from Buy and took his price target to $36 from $28 a share. Epstein left his price target unchanged at $41 when he downgraded the stock.
Based on the pattern of downgrades, investors might consider ditching a buy-and-hold strategy for Virgin Galactic and following the adage “Buy the rumor, sell the news” instead.
Biotech stocks, for example, trade on catalysts such as drug approvals and partnerships. Investors, often times, will hold a basked of biotech stocks to mitigate the risk of one drug approval decision from regulators going the wrong way. There isn’t a basket of space tourism stocks to buy though. There is one. When there is one stock, like a biotech, traders will trim positions into catalysts. It’s a classic Buy in anticipation of news and sell on the actual news strategy.
That means Galactic investors have to track catalysts as well as stock valuation. Looking ahead, investors are waiting for another test flight, around July 11, when Sir Richard Branson will go into space. That could be another short-term catalyst for shares. But after that, the catalyst calendar gets a little quiet. “Beyond the summer of flights, there is likely to be less news flow in the fall as the flight program stands down for maintenance into 1Q22,” adds Walton in his downgrade report.
With Walton’s downgrade, now three of 10, or 30%, of analysts covering Virgin Galactic stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%.
Shares are up about 89% year to date, coming into Tuesday, far better than comparable returns of the S&P 500 and Dow Jones Industrial Average.
Those gains have left the stock trading well above the average analyst price target, which sits at about $33 a share.
Write to Al Root at [email protected]
