Without any reservation, one of the hottest – though incredibly choppy – names on Wall Street is Virgin Galactic (NYSE:SPCE). Essentially a space tourism platform for the ultra-wealthy, in theory, the company has myriad potential revenue streams involving synergies stemming from its primary business. However, SPCE stock dropped despite encouraging developments from Virgin Galactic’s second-quarter earnings report.
Naturally, the question is why? On paper, the space pioneer slipped against expectations for earnings per share. Against a target of a loss of 26 cents per share, Virgin instead lost 30 cents. However, Barron’s Al Root rightly points out that the company doesn’t generate sales. Therefore, earnings don’t matter.
What Virgin did bring to the table, though, was an updated list of reservations for its space flights. From an initial commitment of 400 space tourists, the figure is now 700, representing sequential growth of 75%. In my opinion, that’s tremendous growth, considering that tickets go for a quarter-of-a-million dollars a pop.
Still some analysts wanted to see some distinguishing factors of Virgin’s business beyond just going to the edge of space. So, SPCE stock took a beating following the results.
Both Root and I believe the selloff misses the point. However, I suspect that we think so for different reasons.
SPCE Stock Is a ‘Dark Pool’ Trade That’s No Longer Dark
Generally, I’ve been skeptical about SPCE stock. While I love the almost science fiction narrative that underlines Virgin Galactic, I’ve wondered about its viability. As businesses like the Concorde supersonic jetliner proved, merely catering to the rich is no guarantee of success.
Frankly, my skepticism has grown stronger when I learned about Stefanie Kammerman’s Dark Pool Trader. This is how InvestorPlace contributing editor Jeff Remsburg explains it:
But as a quick recap, Dark Pools are private stock exchanges where the Wall Street “big boys” place their trades. These exchanges allow traders to buy and sell huge blocks of shares without running the risk that other traders will see their hand.
To be clear, I’m using the term dark pool as an analogy. Specifically, I believe that the volatility in SPCE stock was tipped off ahead of time by extreme bullishness in another asset. It wasn’t that apparent earlier. But now, the cat is out of the bag.
The asset I’m referring to is gold.
Who’s Buying the Gold and Why?
If you think about it, SPCE stock is the ultimate bull market play. If you believe that our economy would become fractured, resulting in severe social instability, I doubt that you’d double down on Virgin Galactic.
On the other hand, people are doubling down on gold. As you know, gold prices have soared to fresh records. And some analysts believe that we haven’t seen nothing yet. If so, who’s buying all the gold?
I propose to you that it’s the rich. At four-digit prices, gold is no longer the bargain that it was decades ago. Therefore, you’ve got to have deep pockets to move this market around. To my second question of why, it just makes perfect sense.
From 1970 through 2019, the average year-over-year return of the Dow Jones index is a little over 8%. That shouldn’t surprise you since this has been the “magic” number financial advisors have touted. But what might surprise you is that the average YOY return for gold during the same period is 10%!
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Before you load the boat with gold, the performance isn’t balanced all the way through. During the 1970s, gold’s return averaged nearly 26%, whereas the Dow averaged only 0.39%. In the 2010s, however, the Dow averaged nearly 12%, whereas gold averaged 4.5%.
In this new decade, it’s likely that well-to-do investors (i.e. those that have access to dark pools) see the writing on the wall. Thus, I think it’s more than symbolic that right around the time gold took off, SPCE stock started to waver.
Watch the Precious Metals Market
Obviously, gold itself doesn’t pay dividends. Further, many advisors advise against overexposure to gold-mining stocks that do pay dividends. Historically, the sector has earned a reputation for wildness.
But that’s also why before you dive into SPCE stock, you should check the longer-term trajectory of the precious metals. If they continue to move higher, I’m not sure if that leaves enough room for Virgin Galactic as well.
In a bull market, you would rather invest in technology and cutting-edge businesses than elements on the periodic table. Except of course, maybe we’re not in a bull market after all?
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he is long gold.
