Imagine a world where soldiers can take out the bad guys without putting their own lives on the line.
Or a world where farmers can plant their fields — without stepping foot outside… Or where catastrophic leaks from fuel storage tanks could be prevented long before it’s too late.
Well, thanks to the work of aerial drones, all three of these scenarios — and many more — are possible right now.
In fact, drone technology has become so widespread and affordable that regular folks like you and me can simply pick one up in a store. And on Monday, the Federal Aviation Administration announced that over 770,000 drone registrations have been filed in just the last 15 months.
As senior analyst Jonathan Rodriguez details below, this market is exploding right now. And he’ll show you two ways to play the incredible upside.
Unmanned aerial vehicles, or drones, might be the most important tech device on the market since the smartphone.
In fact, consulting firm PricewaterhouseCoopers estimates the global drone market will be worth $127 billion by 2020.
Unfortunately, when many people think of drones, controversial images of war come to mind.
That’s not surprising, since drones are used prominently in the defense industry.
With good reason. Governments around the world have pushed in on them because they save the lives of countless soldiers around the world every day.
But drone technology has made its way into many other fields, too.
Drones are used in the entertainment industry for aerial filming. They’re also being used in the freight industry, delivering packages to remote locations inaccessible by car. Drones are even being used to plant farmers’ fields, shooting seeds right into the soil.
Heck, PwC believes the UAV market in agriculture alone could fetch $32 billion.
So how can you play the action?
The biggest share of the drone market is held by giant defense companies like Lockheed Martin Corp (NYSE:LMT). and Boeing (NYSE:BA).
But the small-cap players in the space will offer the most compelling growth opportunities.
Here’s how you can play the best of both worlds…
Play #1: Going Small for the Biggest Gains
AeroVironment Inc (NASDAQ:AVAV) is a leading small-cap tech company that specializes in unmanned aerial vehicles.
With a market cap of just $641 million, AeroVironment represents one of the drone market’s juiciest growth plays.
The company manufactures drones for both military applications and agricultural support.
Its agriculture drones can create 3-D maps of fields for farmers for efficient planting.
And using infrared cameras, AVAV’s drones can help farmers identify sick crops quickly — so they can be treated or removed.
The company booked $264 million in sales last year, and revenue has increased at a compound annual growth rate of 15% since 2004.
In 2016, the company posted earnings growth of more than 205%. And on a forward basis, the company is expected to boost EPS by 141%. That’s nearly double the EPS growth rate of the aerospace industry (76.3%).
Better still, the firm sits on $194 million in cash and carries zero debt.
The company’s phenomenal bottom-line growth and lean balance sheet also make it a prime takeover target.
Play #2: Trade a Mega-Cap Defense Stock at a Bite-Sized Price
Northrop Grumman Corp. (NYSE:NOC) is one of America’s largest defense contractors.
The company makes several combat drones, including the MQ-8C unmanned helicopter and the popular RQ-4 Global Hawk.
Last year, Northrop Grumman was awarded a $108 million contract from the U.S. Navy to deliver 10 MQ-8C units by August 2019. This will bring the Navy’s total MQ-8C fleet up to 29.
And the company snagged a $204 million contract with the U.S. Air Force to upgrade its existing fleet of Global Hawk drones.
The company’s aerospace division, which includes UAVs, booked $10 billion in sales last year. The aerospace unit accounted for 44% of the firm’s total revenue of $25 billion.
So Northrop Grumman’s exposure to the red-hot drone market is large.
Instead of buying the shares outright, which run about $239, I’d recommend the January 2018 $260 call options, which are trading for just $7.20.
This offers you leverage of about 33:1 to owning shares.
The options break even if the underlying shares hit $267 by expiration, and the calls double in value if shares reach $273.
Bottom line: With these two plays, you get the best of both worlds: a highflying small-cap drone company… along with low-risk, high-reward exposure to one of the world’s largest aerospace players.