January: strong price development for space and cyber security companies


The Global Security Fund fell by 1.65 per cent (S-share class) and 1.70 per cent (R-share class), respectively, in January, which was worse than the benchmark index MSCI World TR, which rose by 0.72 per cent.

Of the fund's three investment areas, space companies performed best. The S-Network Space TR Index was up over 8.8 percent. Of the holdings in this broad index, Virgin Galactic's price increase was particularly strong, up over 100 percent during the month. With a "short interest" of over 29 percent, the company is a popular short-selling item among hedge funds. This meant that the company probably became a target for Reddit's Wallstreetbets Group, however, this is only a speculation. With a large proportion of popular short-selling companies up so significant for the month, it feels like the price movement is more of a short-term deviation than a long-term trend and we flag that many, if not all, of these companies are likely to fall back to their previous valuation. There are several examples from a historical perspective where people have had influence over the market price, so-called 'cornering the market' and Wallstreetbets is just another example that plays out in modern times.

Cyber security companies also performed very well with the ISE Cybersecurity Index up over 6.4 percent. However, there was no broad rise in cybersecurity companies and the same pattern played out in the cybersecurity sector as for the space sector, where weaker companies' share prices rushed away. Blackberry's share price went from CAD 8.5 to above CAD 35, a price increase of over 300 percent. It was a more difficult month for the more traditional security companies, the Dow Jones Aerospace & Defense Index fell by 4.4 percent.
January is an active month in terms of quarterly reports - over 30 percent of the portfolio companies reported. The reports were in line, or better than expected, but price developments were still pressured by the market for many of the companies.

On January 4, the information was released that Teledyne Technologies will acquire Flir Technologies for USD 7.36bn. Flir, which is one of the portfolio's holdings, specializes in thermal cameras as well as screening systems and drones. In 2016, the company acquired Prox Dynamics, a Norwegian company specializing in small unmanned drones. Flir's share price has been under pressure for a large part of 2020, but the news of the Teledyne acquisition caused the price to rise by almost 20 percent in one day. Flir was up 20.7 percent for the month, which benefited the fund by 1.1 percent and was the fund's best holding.
Microsoft released its report on January 26 and the result was much stronger than expected. Demand for the Azure cloud service grew more than expected and total sales were up 16.7 percent year / year and 7.15 percent above expectations. Increased sales for games and the Windows operating system created better revenue margins, which were reported 24.2 percent above expectations. There will be competition from Amazon and Google for cloud services, which may dampen sales next year, but the company is well positioned for future growth and is one of the larger holdings in the portfolio. Microsoft was up 6.1 percent for the month, which benefited the fund by 0.35 percent.
The cybersecurity company Crowdstrike, which is considered one of the industry's best and a clear favorite in the endpoint detection segment, was up 3.7 percent, which benefited the fund by 0.25 percent. Leidos, another cybersecurity company that does not produce its own products but works closely with the US government, will release its report in February. As usually happens after a contract procurement, the contract losers are against the decision. This was also the case with Leidos regarding the IT support agreement with the US Navy, but the court decision in the USD 7bn procurement was that there was no counter-argument to the decision, which favored the price development for the company, which was up 2.6 percent. This benefited the fund by 0.1 percent.
It was a tough month for Lockheed Martin, who reported on January 28. The company reported slightly better sales than expected but slightly weaker revenues, however, the result was largely in line with expectations. The company's forecast for the coming years is better than before and there is a USD 147bn order backlog, which will help dampen the downside. The Covid-19 pandemic has affected the company negatively and there is a lot of work left around the F35 fighter aircraft, but the company has attractive growth in the space segment and has strong growth in the hypersonic area. Lockheed Martin also announced that it has acquired Aerojet, which will provide major synergies in the space field. The company's share price was down 7.8 percent for the month, which affected the fund negatively by 0.5 percent.
L3 Harris Technologies released its report on January 29, and sales growth was down 3.6 percent year-on-year. The company has a significant exposure to the commercial aircraft industry, which acts as a headwind and affects management's forecast for the coming years where the company believes in a growth of 3 to 5 percent. Despite the forecasts, the company beat market expectations for both sales and earnings per share. Like many other traditional security companies, L3 Harris Technologies invests heavily in space and hypersonics is an area that the company believes can grow and be lucrative in the coming years. L3 Harris Technologies was down 7.7 percent for the month, which affected the fund negatively by 0.4 percent.
The cyber security company FireEye will release its report next month and after a very strong December, when the company was up over 50 percent, the price fell by 7.3 percent, which affected the fund negatively by 0.3 percent. Growth in the cyber security area continues and it will be exciting to see if the company can increase sales growth.
Northrop Grumman reported on January 28, beating both sales expectations and adjusted earnings per share. With a 25 percent increase in the company's order backlog, it is likely that sales growth will be better than the company's forecast of around 4 percent. The share was down 4.3 percent, which affected the fund negatively by 0.2 percent.
The trend for growth in cybersecurity continues and the companies in this segment benefit from rising share prices. The traditional security companies have a significant exposure to heavier production, which has been negatively affected during the Covid-19 pandemic. Space investments from these companies are increasing and the companies are positioning themselves strongly for the future.

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Monthly Commentary – January 2023

What a start we had to the stock market year 2023 and positive returns broadly across several asset classes. It has been risk on and risk taking