Virgin Galactic (NYSE:SPCE) is a stock for the dreamer in all of us. I am a fan of tech and sci-fi, so this is right up my alley. Today’s write up is positive but definitely not blindly fanatic. I look for realistic opportunities to invest and I don’t let my emotions get in the way. SPCE stock broke through the atmosphere where the air is thin for bears. But that doesn’t mean that I have to jump all into it up here.
The bullish thesis for investing in space travel is very simple. You either believe in it or you don’t. Currently, that’s the only public company whose business is to take commercial flights into outer space. If billionaires Richard Branson and Chamath Palihapitiya believe in it then so can I. Risking some money alongside of proven winners seems reasonable. In the long run, they will get the job done. Owning SPCE stock makes sense for investors looking to reach for the stars.
While it is the lone wolf, I suspect soon either Elon Musks’ SpaceX or Jeff Bezos’ Blue Origin will go public. These two leaders are pretty competitive and they get stuff done. They brought us Tesla (NASDAQ:TSLA) and Amazon (NASDAQ:AMZN), so they will launch this industry into the heavens.
This is a speculative bet because the strategy for owning SPCE stock is entirely dependent on future results. Their efforts now won’t have tangible results on their P&L statements for a while.
Those Who Believe in SPCE Stock Are Patient
Investors need strong conviction to own speculative stocks like this. I don’t mean to imply that it’s teetering. But to invest in it is to believe they will accomplish future successes that aren’t happening today.
The stock soared last week because they announced updated test flight schedules. To judge the value of the stock today from the traditional metrics is ridiculous. The analyst opinions are even sillier. Morgan Stanley expert downgraded the stock to hold and raised the price target to $30. SPCE stock is already above $50 so where is the logic in that? They imply that investors should hold it until it falls 40% to hit their price target. Clearly that’s not right.
To try and time entries at perfect levels in the long run is futile. In hindsight, the smart thing to do was to buy it on dips. That’s been my message for eons and I was even clear on that just out of the March crash. However the speculative nature of this investment causes people to hesitate. I’ve used options in the past to profit from the SPCE stock price action. When markets panic out of it that’s when I look for opportunities to sell put options. This is only a good idea if an investor is looking to own shares.
So far today my message is to own Virgin Galactic stock for its future gains. But since I’m a trader at heart I just can’t do it with confidence at these altitudes. I would at most only take a partial position especially that the test flight this month is a binary event. We’ve seen this happen many times before in this ticker. The exuberance from 2019 fueled a 450% rally. It all ended in disaster as the stock fell back into the single digits last march. The rally now also feels like it has gone out of control.
My concern stems from what is going on with the GameStop (NYSE:GME) fiasco. SPCE stock is in the middle of that battle between Wall Street and Main Street. It spiked $20 about the same time GME stock went ballistic. Instead of chasing it up here, I would rather wait for dips close to $35 before jumping in. Those who are not long SPCE already and buy it now are committing to owning it a very long time.
It’s OK to Trade Around the Action
My nature is to find entry points that makes sense in the short term as well. Therefore I would add the first alerts to track it near $43 per share. If an investor is absolutely itching to owning it now, they should consider using options.
I say this because earnings and a test flight are coming up and those are coin tosses. Management will have to say incredible things to meet the expectations that are now inside the SPCE stock. The overnight reaction to the reports does not depend on the quality of the earnings. It has more to do with what investors expect and how they react to the message from management.
Using options, I can sell SPCE puts instead of buying shares. This creates a margin of error. If I buy the shares at face value my money is at risk right away.
For example, I can sell the SPCE March $41 put and collect almost $5 per contract. This makes me long the stock with a huge buffer zone. The stock can fall more than 20% and I still wouldn’t lose any money. The worse case is that I must own the shares at a much lower price. If the stock rallies then I would’ve created income without any out-of-pocket expenses. This is not a strategy that works for someone who does not intend to own the shares of SPCE stock.
A Bit of Uncertainty
To summarize the message today is to say that I am optimistic about the future of space travel. I’m not as certain of the near-term upside potential of this stock. If I must own it, I would rather use options methods or wait for dip. At some point investors have to admit that they’ve missed an opportunity and wait for the next one. I most definitely do not think that shorting it is a good idea.
Overall I am cautious about the whole equity market. We are nowhere near the ideal conditions that we had before February 2020. Yet Wall Street is breaking records every day. Main Street, on the other hand, is still struggling on a global basis. These two conditions should not coexist and cause me some worry. I don’t want to short the market because that’s crazy, but I do want to be careful.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.