With the S&P 500 up 45% from its March lows and with the Nasdaq at all-time highs, the level of speculation has been climbing in the market. For Virgin Galactic (NYSE:SPCE) though, I think SPCE stock is actually a worthy speculative holding.
I have talked a lot about speculating vs. investing lately and there’s a huge difference between the two.
Investing involves combing through a number of considerations and attempting to find the best “bets” out there. They include rummaging through the financials, giving a reasonable attempt at modeling for future growth and perhaps observing the technicals, if you’re into that sort of thing.
Speculating isn’t the same. While we can apply the same principles, oftentimes there are glaring issues that make these stocks unattractive from an investment perspective. However, that doesn’t mean there isn’t room for speculative positions in one’s portfolio.
Speculation vs. Investment
Taking stakes in J.C. Penney (NYSE:JCP), Chesapeake Energy (NYSE:CHK), Hertz (NYSE:HTZ) is often gambling. Yes, it’s also speculating, but it’s not high-quality speculation.
Investors were simply buying these stocks hoping that they would rally hundreds of percent and they could cash out with their big winnings. While some may have, most didn’t comb through the financials or do any forensic accounting to see if there was uncovered value in these names.
They were bankruptcy candidates and investors were hoping to make a buck on a quick flip.
However, there is healthy speculation. Names like Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) are possible considerations in this regard. These stocks have rallied thousands of percent over the years. Investors in the early years were buying these names knowing full well that the current fundamentals didn’t support the valuation.
That didn’t stop them, though. They saw the potential for what Amazon, Tesla and Netflix could become, so they bought the stocks. Despite heavy volatility, they were rewarded.
While Virgin Galactic may not become the next Amazon, it’s not a pure gamble like CHK or JCP. Instead, Virgin Galactic has several catalysts for potential gains.
SPCE Stock Is a Solid Spec Play
Recently, reports surfaced that Virgin Galactic is nearing completion of the FAA license approval. As of May, it has completed 24 of the 29 necessary milestones, with expectations to clear the remaining hurdles in the next one to two flights.
That news came after a pair of deals with NASA were announced over the last few months. The first was announced during the company’s earnings report in May. It included developing high-speed aircraft, which could play a big role in air travel one day. That’s noteworthy, as not only is there a potentially large long-term market here, but it would help diversify Virgin Galactic away from space tourism.
Now, NASA and Virgin have come to agreement on encouraging “commercial participation in orbital human spaceflight to the International Space Station while enabling the development of a robust economy in Low Earth Orbit.”
These deals will not add revenue overnight. That’s unfortunate, because right now, Virgin Galactic could really use some sales. Put simply, Virgin Galactic doesn’t really have any. That makes it nearly impossible to value the entity and for many investors, makes it impossible to justify its $3.5 billion market cap.
However, it’s got the balance sheet to continue working toward its long-term goals. Virgin Galactic stock carries about $420 million in cash with no real debt.
Will it all pan out? It’s impossible to guarantee that, of course. However, my point isn’t that Virgin Galactic is a better corporation than Apple (NASDAQ:AAPL) or will outmuscle Amazon. It’s simply that it has the recipe for long-term potential if some of its current opportunities pan out.
Trading Virgin Galactic
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Buying into spec plays is not an easy thing to do amid the current global climate. However, one can see that the stock is getting tighter and tighter on the chart above. Maybe it breaks lower — again there’s no guarantee for gains here.
Based on the 2020 range, Virgin Galactic could have 50% downside to the current lows or 250% upside to the current high.
I don’t hate the idea of owning a little Virgin Galactic stock in the event this becomes a moonshot stock — no pun intended. However, as is usually the case with these higher risk plays, I’d prefer a lower entry point.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL.
