The ARK Space ETF should consider owning these pure-play space stocks

We have also had a lot of volatility in both the space names that we love and with the ones that we do not. This feels like a good time for me to give more clarity on my thoughts about the Space Revolution, in which we have been accumulating positions, and some names I am starting to bet against. (I am only betting against the stocks in the hedge fund and not in my personal account.) 

Also by Cody Willard: This SPAC with ties to NASA will make daily runs to space

I am treating my Space Revolution investments as a basket of new technology companies that are disrupting the legacy space industry by bringing newer, better and more cost effective technologies to the market. I am hedging this basket by shorting — mainly with put options — legacy space companies that have older, more expensive technologies and generally poor balance sheets. 

Here are the Space Revolution companies I am cautiously investing in:

Longs:

• Rocket Lab/Vector Acquisition Corp.
  VACQ,
  +2.02%
  : I have written extensively about my favorite publicly traded space company. This vertically integrated company is involved in multiple areas in the Space Revolution. The company is currently sending satellites to orbit, and will be sending astronauts to space, building their own Photon satellites (which do a lot more than the typical old technology satellites), and producing components for others to use in their own satellites. This is the company that is closest to emulating some of SpaceX’s many successes. SpaceX is privately held and very hard to invest in (although I own some SpaceX equity in the hedge fund), which makes Rocket Lab the best publicly traded Space Revolution play.
• Virgin Galactic
  SPCE,
  +1.70%
  : I first invested in and highlighted this stock for MarketWatch readers when it was at $10 and still trading with the ticker IPOA. I have trimmed some along the way in the 18 months since then, but I still own this name in both the hedge fund and in my personal account. SPCE, just like all the other space companies, is probably a little overvalued at the moment. Especially with $0 revenue and not being able to get its test flights successfully into orbit. But again, we are looking up to 30 years down the road.
• Astra Space/Holicity
  HOL,
  -3.10%
  : Here is another name that I have recently started buying in tranches. In a recent article, I introduced you to this company and why I think it is also going to be a winner. Just like a lot of our space stocks, HOL has been very volatile this week. I’m pretty sure that investors have been trying to front-run the ARK ETF on speculation it will be a holding. On Monday, ARK published a list of holdings that are going to go into the ETF.
• Redwire/Genesis Park Acquisition Company
  GNPK,
  +0.04%
  : This company announced March 25 that it is coming public via a SPAC. Of all the recent SPACs, this one is coming public at perhaps the most reasonable valuation and certainly at the smallest valuation of $675 million market cap. The company, which is rolling up small Space Revolution suppliers, says it is already profitable, free cash flow positive and forecasted to grow revenue at about 60% a year for the next five years. Redwire is a “picks and shovels” play for space. It is a combination of seven space-infrastructure companies that were combined into one holding company. It could have an exciting future that includes building and repairing space infrastructure on orbit, supplying component parts to a variety of space companies, and digital engineering of spacecraft. I bought a first tranche of what I expect will be a medium-sized holding.
• BlackSky/Osprey Technology Acquisition Corp.
  SFTW,
  -0.39%
  : This company just hitched a ride on a Rocket Lab rocket to launch an Earth-observation satellite into space. They were so happy with Rocket Lab that it signed a deal to launch eight more satellites this year. BlackSky is building a constellation of these Earth-observation satellites that will be able to monitor activity on our planet from dusk until dawn and through proprietary software, and be able to provide actionable intelligence to customers in a variety of industries. The company sees about two-thirds of revenue coming from on-demand satellite images and about one-third from a recurring-revenue model that sells data that its software algorithms tailor for customers. Like with GNPK, I bought a first tranche of what I expect will be a medium-sized holding.
• Spire/NavSight Holdings
  NSH,
  +0.45%
  : Spire is a direct competitor to BlackSky. The market for the company’s products is so large that there are going to be multiple winners in this “space.” If you followed news of the container ship that was stuck in the Suez Canal, I am sure you have seen a lot of high-resolution satellite images of it stuck in the mud. In addition to taking pictures of the aftermath, here is an example of how Spire’s technology could have prevented it. The possibilities of potential use cases for this technology is almost limitless. Just like BlackSky, Spire runs collected data through its own software and sells it to end users. Both companies are building a huge database of information taken from space that will be usable to customers. Both SFTW and NSH are trading around 14 times 2022 revenue. Which ain’t cheap, but hopefully won’t turn out to be too expensive for companies with so much growth potential ahead. I bought a smaller position in this name this week, leaving lots of room to buy more over time as I plan on keeping NSH a small-ish position.

The companies above are in my “long” basket of Space Revolution companies. As more companies disrupt legacy players, I will be hedging the space portfolio by shorting the companies that will be losing market share, just hanging on or even completely going out of business. 

I have one other category in my space basket that I am calling:

Stay Away:

• AST & Science/New Providence Acquisition Corp.
  NPA,
  +0.09%
  : The company is planning to provide satellite-based cell reception to rural areas. That’s not a bad idea, but I didn’t like what I found when I dug into the management team’s history or the overall nuts and bolts I found. 
• Momentus/Stable Road Acquisition Corp.
  SRAC,
  +2.14%
  : After owning this stock for a while, I changed my mind. The company has had delays in launch and national-security issues involving the ownership of the company by a Russian national (who has since stepped away from the company). The company is billed as the “FedEx of space” based on its satellite tug that will move satellites around to different orbits. Rocket Lab is already doing this with Photon, and Rocket Lab does not have to depend on a third-party launch provider like Momentus does. I might be wrong, but I just do not like the risk/reward scenario. I am staying away from this one too.

Cody Willard is a columnist for MarketWatch and editor of the Revolution Investing newsletter. Willard or his investment firm may own, or plan to own, securities mentioned in this column.