Another week, another pick! Except this time we are not buying; we are selling. Not actually selling, as CFR doesn’t have any legal tender in the market, but rather reallocating one of our current positions. This equity has been an absolute eyesore in the portfolio, and I believe it’s time to exit, for the time being. This position is UFO, the Procure Space ETF. We initially picked this stock about two months ago, on May 18th, and it’s currently down 24% from where we entered at $57.74 a share. The initial thesis for the stock was to capitalize on the momentum from the space sector, prior to the SpaceX IPO, as rockets and space were all the buzz.
Unfortunately, the sector would soon face too much of the wrong buzz, as 10 days after we published our pick, a Blue Origin rocket exploded on a launch pad in Cape Canaveral, Florida. While Jeff Bezos’s rocket company isn’t a part of UFO and is not publicly traded, I believe it was enough to rattle space-frenzied investors into taking profit and getting out of their positions. The explosion seemed like a perfect time for anyone who still somewhat believed in the space industry to free up some dry powder for SPCX, which would hit the ticker 15 days later. As seen in the chart below, UFO has not been able to bounce back since its all-time high on May 28th, and has continued to fall through July. All medium-term technical indicators (8, 20, and 50-day moving averages) currently flash sell.
To make matters trickier, the fund now holds SpaceX, and the asset accounts for 6.17% of the ETF’s holdings. As of writing this article, SPCX is currently trading around $111, which is about an 18% drop from its IPO price of $135 and about a 50% drop from its all-time high of $225 (which it hit three trading sessions after going public). With SpaceX viewed as the dominant company in the space sector, and currently trading below its IPO price, it does not bear well for the rest of the sector and the ETF itself.
So what now? CFR will be officially “selling” its position in the Space Procure ETF (UFO) and taking the 24% loss on the chin; however, we aren’t out of space entirely. There is a strong possibility of a reentry into the ETF as the space sector continues to cool, and we’ll be watching the chart for another strong setup to buy. I personally believe that the space sector will be a booming industry down the road, especially once SpaceX gets its feet firmly planted, all lock-up periods for employees or those holding private placement shares expire, and the company starts to make a net profit.
UFO, you are down, but not out, and we will see you again soon.
P.S. The article started off by mentioning reallocation, so where is the UFO position going? Now the market has been giving me a major headache, and it has been exceptionally difficult to read, and conviction at the index level has become increasingly challenging. I was excited for a rotation into financials, but I think that ship has sailed as all the banks obliterated earnings and the markets already priced in possible rate hikes and increased financial volatility (which would both benefit the banks). It’s also important to note that the realized 1-year SPX correlation is historically low, at 0.086 (8.6%) according to Bloomberg. This means that there is no one specific macro variable driving the market bus right now, and that winners and losers are spread out across sectors and companies. It means you can’t really be “bullish” or “bearish” on the current market; rather, individual sector picks matter more now than they normally do. Our takeaway is that small-cap value is the way to go, and the UFO reallocation will go into AVUV, a stock we suggested a few weeks ago. With overall major indexes NOT driving the market (seen through the low correlation), business fundamentals and consistent cash flow/revenue are more important now than a one-directional flow seen throughout all sectors.
Small caps for the win!
