The Drone Market Index contains a wide variety of stocks across multiple sectors, and spans the risk spectrum. Here is how to tailor it to your unique investment strategy.
More than an entire fiscal quarter has elapsed since I originally posted the DRONES Drone Market Index, so I figured it’s high time for an index update, and discussion about how this portfolio fits into various investors’ styles.
Of the 33 tickers that originally appeared in the index 4 months ago, I’ve had to make 3 changes:
- Replaced FLIR with TDY, once Teledyne Technologies bought the company out.
- Removed UBER, as it neared the completion of selling its drone-related Uber Elevate to Joby Aviation. (Of note, Joby Aviation recently entered a deal with a SPAC that could lead to a future public listing. Stay tuned….)
- CUB was acquired by private equity firms, and is no longer publicly traded.
Now that we are down to 31 tickers in our DRONES Drone Market Index, let’s update its 5-year history, and take a fresh look at its vitals.
Dividend Yield: 0.44%
5-Year Monthly Beta: 1.51
As always, this information was collected and processed in about 30 seconds using my automated investment research tools.
This weighted index returned 274% over a five year period—that is a CAGR of 22%, excluding dividends. The Drone Industry CAGR is expected to increase to over 50% in the years following 2021, as technology matures and restrictions are eased.
If an investor would have bought one share of each of these companies in fall 2016, it would have cost $3108, followed by an additional $20 to purchase two more shares that first listed in 2019 and 2021 (total investment of $3228). As of the time of this writing, the net value of that portfolio would be $9184!
To be fair, AMZN and GOOGL are in the DRONE Index, with outsized growth that might be skewing the figures. However, I offer two counterarguments:
- Both these companies announced intentions to compete in the Drone Delivery space in 2014, so 2016’s investors were already pricing in anticipated growth from drone operations.
- These companies are only weighted at 0.9% of the DRONE Index, whereas some drone-specific companies are weighted at 9.0%.
These growth figures are validating historical predictions about the growth of the Drone Industry.
Now, let’s turn from philosophical to practical. How can we, as retail investors, get a slice of the pie?
Let me begin by stating that we each have our own investing styles based on time horizon, risk tolerance, excess cash available, and investment objectives. There is no such thing as a “one-size-fits-all” approach. It is important to play your own game, not the game that somebody else is trying to convince you to play.
I will continue by gently reminding you that you should be seeking financial advice from a financial advisor or a trusted mentor. Unless you happen to be one of my children, I am neither. Do not make any financial decisions based solely upon what you are reading in my articles.
With that out of the way, let’s take a look at asset allocation. Every investor should have some broad plan for how they devote their financial assets in order to meet their own objectives—in other terms, we should all have an asset allocation strategy. Think of it as your own personal pie chart of where your money is growing. For each slice of the pie, you should also have a decent idea of your expected annual growth. If you have a pie slice for bonds, then this slice probably grows 1-2% annually; your income equities slice probably grows around 5% per year, plus another 3% in dividends, etc. There are multiple approaches to formulating this strategy.
- One approach seeks a balance of Equity Investments (stocks, ETFs, and mutual funds) with Fixed Income Investments (bonds and treasuries), adjusted to the investor’s age. According to one rule of thumb, a 40-year old investor should have 40% of their wealth in fixed-income, with the remainder in equities.
- A different approach seeks metered exposure to various market sectors, and is common with equity-heavy investors. For example, a risk-tolerant investor may crave a Technology-heavy portfolio, while a risk-averse investor may be more comfortable with the SWANs in the Utility and Consumer Staples sectors.
- A third approach, and the one that I personally use with my equity portfolio, is to categorize each stock as Income, Growth, Speculation, or Cyclical. I then divide my pie chart by total allocation. Here is a sample that roughly matches my own personal objectives.
I expect my Income pie slice to grow around 8% per year (stock price plus dividends), while I have higher expectations from the other pie slices.
When I think of an Income stock, my archetype is a mature company that has grown to roughly its terminal size, and is now generating sustained and sustainable Earnings that it distributes as dividends. It is on the Plateau of Profitability. It might even be boring, which is reflected by low volatility. I get paid each quarter whether the share price goes up or down, and I’ll eventually sell it when I want to reallocate the capital—hopefully while the price is up.
My ideal Growth stock is a company that has climbed out of the Valley of Debt and is scaling the Foothills of Revenue. It is somewhat interesting, whether as a young company in an emerging industry, or making a play to capture greater market share with new or better products—the volatility is a bit higher. Some investors prefer to see Earnings grow quarter-over-quarter, year-over-year, but I can overlook low Earnings if the Revenue is steadily increasing—it’s a sign that the company is reinvesting its profits back into itself, as a perpetual growth machine.
Speculative stocks carry greater risk: there is no justification in the financial statements that this company will still be in business next year, and no financial professional in their right mind would recommend it to an investor. The Revenue has been shaky, perhaps non-existent. Volatility is off the charts, and a single social media post sends the share price through the roof or the floor. There is no company history to show a solid trend upwards. Maybe it’s a new product, or a new market, and nobody knows if the idea will stick. It looks a lot like AMZN did when it went public in 1997, vacillating between $1.50 and $5.00, adjusted for splits and dilution (AMZN is over $3,500 today). But, you have a hunch that it’s a good company in a burgeoning market, so you take the risk. With great power comes great responsibility; with great risk comes great reward. This is the principle that keeps venture capitalists going—they only need one success to overcome ten failures.
Cyclical investing rides the waves and troughs of the economic cycle, as certain sectors tend to perform better during various market cycles. Economic expansion? Go buy some automotive manufacturers and airlines! Economic recession? Better pick up some water utilities! Everybody is buying when it’s hot, and everybody is selling when it’s cold. As a caution, Cyclical investing is a lot like “timing the market”, which is generally seen as a risky strategy—that’s exactly why I do it.
Now that I’ve laid out some philosophy, I’ll get to the meat of this article: how to invest in the Drone Industry, according to your own personal strategy. In doing this, I hold one First Principle to be true: the Drone Industry is a burgeoning market, and will outpace nearly all other markets over the next decade. This is actually one of the leading reasons that I, myself, left the cockpit to join the unmanned aviation community a decade ago.
For our purposes, I’ll be categorizing each stock as Income, Growth, or Speculation. If you choose to follow a different approach, such as sector exposure, I encourage you to stick with your plan. As I dive into each individual stock, I’ll be sure to categorize it by Sector, Industry, and Sub-Industry, so you can determine where it fits into your own pie chart. And then you can do your own analysis to determine whether to buy, sell, or do nothing. If you are a fixed-income investor, well…. I’m sure many of these companies sell bonds too.
As I categorize these, I am not implying that these are good investments for their intended purposes—many are actually bad investments per my categories’ objectives. I am simply grouping the companies in a manner that makes the most sense to me, and am welcome to having discussions in the Comments with those who see it differently.
Income Portfolio
Ticker Name Asset Allocation Yield Beta
LHX L3Harris Technologies, Inc. 22.58% 1.86% 0.75
TXT Textron Inc. 19.35% 0.12% 1.8
GD General Dynamics Corporation 9.68% 2.53% 1.13
GFF Griffon Corporation 6.45% 1.26% 1.99
NOC Northrop Grumman Corporation 6.45% 1.70% 0.83
JBL Jabil Inc. 6.45% 0.55% 1.37
UPS United Parcel Service, Inc. 6.45% 1.93% 1.05
FDX FedEx Corporation 6.45% 1.00% 1.26
LMT Lockheed Martin Corporation 3.23% 2.73% 0.98
HON Honeywell International Inc. 3.23% 1.68% 1.18
RTX Raytheon Technologies Corporation 3.23% 2.35% 1.06
INTC Intel Corporation 3.23% 2.45% 0.6
WMT Walmart Inc. 3.23% 1.57% 0.47
Weighted Yield: 1.45%
Weighted Beta: 1.18
You probably know almost every company on this list by name—that’s because they are very diversified. If the Drone Industry became illegalized or leapfrogged next month, these companies’ investors would barely notice the difference on their bottom line. These are the “safe” companies that are dipping their toes in the Drone Industry, but can pull out in an instant and continue to thrive. They all have a long history of positive performance and sustained dividends, and drones are just another thing that they do.
Growth Portfolio
Ticker Name Asset Allocation Yield Beta
AVAV AeroVironment, Inc. 14.49% 0.00% 0.35
UAVS AgEagle Aerial Systems, Inc. 14.49% 0.00% 5.17
KTOS Kratos Defense & Security Solutions 13.04% 0.00% 0.74
AMBA Ambarella, Inc. 8.70% 0.00% 1.37
MRCY Mercury Systems Inc 8.70% 0.00% 0.98
TRMB Trimble Inc. 7.25% 0.00% 1.53
HEI Heico Corporation 5.80% 0.13% 1.28
PLTR Palantir Technologies Inc. 5.80% 0.00%
TDY Teledyne Technologies Inc. 4.35% 0.00% 1.12
IIVI II-VI Incorporated 4.35% 0.00% 1.5
CMTL Comtech Telecommunications Corp 2.90% 1.66% 1.92
GPRO GoPro, Inc. 2.90% 0.00% 1.22
NVDA NVIDIA Corporation 2.90% 0.08% 1.37
BA Boeing Company (The) 1.45% 0.00% 1.63
AMZN Amazon.com, Inc. 1.45% 0.00% 1.15
GOOGL Alphabet Inc. 1.45% 0.00% 1.02
Weighted Yield: 0.06%
Weighted Beta: 1.59
Some of these companies are diversified, and could easily pivot away from drones if a catastrophic industry event took place. Others are so drone-dependent, they would simply cease to exist if the Drone Industry was upended overnight. Overall, these companies reinvest earnings back into themselves. Only one company offers an appreciable dividend that almost earned it a spot in the Income Portfolio, but I think it is in a nice position to expand operations as drones infiltrate all industries, so I am listing it here.
Speculation Portfolio
Ticker Name Asset Allocation Yield Beta
WKHS Workhorse Group, Inc. 72.73% 0.00% 2.66
VLDR Velodyne Lidar, Inc. 27.27% 0.00% N/A
Weighted Yield: 0.00%
Weighted Beta: 2.66
Only two companies, and one is so young that it doesn’t even have a 5-Year Monthly Beta! There is minimal company history, and no rising Revenue trend to point toward as a positive growth signal. Volatility is all over the place. Neither of these companies is a pure drone play, but both would be significantly altering operations if the drone industry got disrupted. Every book you will read on fundamental analysis will tell you to run away from these stocks. But, what if they push through the Valley of Debt, and someday emerge as S&P 500 stocks? This is the land of speculation, where the risk is great, but so are the rewards.
There you have it: an update on the DRONES Drone Market Index, and a breakout of portfolios tailored to various investing styles. Once again, please do not place any trades without doing your own research and consulting trusted advisors. Until we meet again, happy investing!
Paladin Automation LLC 
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