It’s been a few months since the last DRONES U.S. Drone Market Index update, so I thought I’d give a 2021 end-of-year update.

In the grand scheme of things, 2021 was a remarkable year for investors. Interest rates neared their all-time lows. The tech-heavy NASDAQ saw market valuation multiples near historic highs. The quantity and value of IPOs set a new record. “Reopening” stocks soared as general productivity improved. “Meme stock” was added to the English lexicon. 

2021 continued the ecstatic (perhaps euphoric) market capitalization growth trend that began in late 2020. As fixed-income securities became less appealing, investors clamored to throw money into new and innovative companies with sheer optimism. Shares of some emerging companies were trading at over 100x multiples. The FOMO (fear of missing out) rage was fueled by social media and novel investment tools catering to the Millennial generation.

These trends had started to decline by late 2021, and 2022 opened with a complete reversal. The joy ride appears to be ending as investor sentiment seems to be shifting from speculative innovators to more defensive companies that “do things and make stuff” (to borrow a phrase from Jim Cramer).

The drone companies that comprise the DRONES U.S. Drone Market Index come from a diverse collection of sectors and industries. The majority of drone stocks fall within the “Industrials” sector, “Aerospace and Defense” industry. However, some could just as easily be categorized within the “Technology” sector due to focus on emerging hardware and software. In fact, many of DRONES highest allocated drone stock symbols look more like a software company than an aircraft manufacturer. 

Let’s take a look at the graphs and see what story the numbers tell us.

DRONES U.S. Drone Market Index

DRONES U.S. Drone Market Index
DRONES U.S. Drone Market Index

Yield: 0.50%   Beta: 1.32

Overall, DRONES continues its upward trend of profitability. It showed 16.6% growth YOY (year-over-year) in 2021, compared to 28.8% YOY growth in the S&P 500. On the surface, this would appear to make U.S. drone stocks an inferior investment to an S&P 500 ETF or mutual fund. However, it is important to note that S&P 500 is a weighted index–25% of its value lies in 6 companies (Apple, Microsoft, Amazon, Alphabet [Google], Meta [Facebook], and Tesla). These six juggernauts had outsized market performance in 2021, boasting tremendous P/E multiples. Market analysts question whether the growing share price is sustainable in the upcoming year.

DRONES volatility is in the right ballpark when compared with the stable S&P 500. About half of the tickers are in the S&P 500, which implies that the other half are smaller companies which tend to have higher volatility.

DRONES Income Portfolio

DRONES Income Portfolio
DRONES Income Portfolio

Yield: 2.00%   Beta: 1.10

Most DRONES Income Portfolio symbols are S&P 500 companies, so it comes at no great surprise that volatility is close to 1.0. They historically offer a healthy dividend yield of 1.5% – 3.0%, though some have recently cut the dividend to climb out of the COVID-19 hole. 

The Income Portfolio exhibited 13.9% YOY growth, plus 2.0% dividend yield, for an effective growth of 15.9%. Not bad for a stable and diversified portfolio, with a sustainable future.

DRONES Growth Portfolio

DRONES Growth Portfolio
DRONES Growth Portfolio

Yield: 0.03%   Beta: 1.47

The DRONES Growth Portfolio is built from mature companies with historical earnings and no (or low) dividends. Remember the top 6 companies in the S&P 500 above? Only one (MSFT) offers a dividend (0.8% yield), yet they are driving the highest share price gains due to internal reinvestment of all profits.

Volatility is a bit higher due to smaller companies in an explorative technology. Every FAA policy change impacts some of these companies, which is reflected in share prices. Economic and industrial factors, such as rising interest rates and semiconductor chip shortages, have very real impacts on these companies’ bottom lines.

The DRONES Growth Portfolio exhibited 20.7% YOY growth in 2021, coming closer to the S&P 500 benchmark. For many businesses with high conviction for drones, the best is yet to come.

DRONES Speculation Portfolio

DRONES Speculation Portfolio
DRONES Speculation Portfolio

Yield: 0.00%   Beta: 1.97

The DRONES Speculation Portfolio is the riskiest of the three, but also carries the potential for the greatest rewards. Some of these businesses are fighting for their very survival as they bleed cash on hand each year without turning a profit. The 2021 YOY growth was a 65% loss, as compared with a 592% YOY growth in 2020. This portfolio only holds 3 companies, so a significant event to a single company causes a tremendous effect on the portfolio.

Drone Stocks versus Market Indices

DRONES Market Comparison
DRONES Market Comparison

This graphic depicts the DRONES index alongside the three major market benchmarks (S&P 500, NASDAQ Composite, and Dow Jones Industrial Average). The trendlines are normalized to have a common starting point in order to highlight relative growth over the period. 

The graph clearly shows a tight correlation between the DRONES index and the NASDAQ Composite until late 2021. This reflects market sentiment, as investors began to abandon risky companies in favor of safer havens. Many DRONES companies also happen to be major Defense contractors; their 2021Q4 and 2022Q1 revenues are jeopardized by an extended Continuing Resolution while Congress fails to approve the 2022 Defense Budget.

As 2021 Annual Reports roll out this spring, I’ll focus on individual companies and niche industries. I usually expect to see some significant share price movement after the Earnings calls, so this graph could look very different in a month or two. 

Please exercise your own due diligence when making investment decisions. In fact, I recommend following the advice of a Certified Financial Planner rather than an internet blog. I hold long positions in some companies listed in the DRONES Index.


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