Why I'd Bend the Rules on Rocket Lab
Here's my revised plan for this old 'Stocks Under $10' favorite.
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As I write on Tuesday morning, one of my favorite "Stocks Under $10" portfolio names was and is Rocket Lab USA RKLB. Let's take a look at some news and action around the stock, and see why violating my net basis could be necessary here.
The stock spiked in late November into early December, reaching an apex at $28.10. This came after reporting third quarter earnings in mid-November, revealing an unadjusted loss per share of $0.10 on revenue of $104.808 million. The earnings print beat Wall Street by a penny. The sales number beat expectations and was good enough for year-over-year growth of 54.9%. Since that top, the stock has fallen out of bed a bit, closing at $23.24 on Monday evening, that was down 5.83% for the day and down 17.3% from that top tick a little more than a week ago.
Remember Guidance?
The stock took current quarter guidance above where Wall Street had been at the time. Rocket Lab projected quarterly revenue generation of $125 million to $135 million. That brought the lower end of the company's range above the $122 million that Wall Street had been looking for. Wall Street has brought consensus up to $130 million since, which is simply the center of the company's guidance. It sees unadjusted gross margin at 26% to 28% or 32% to 34% if adjusted. The projected adjusted earnings before interest, taxes, depreciation, and amortization comes in at a loss of $27 million to $29 million for the period.
Solid Balance Sheet
The balance sheet is in very good shape. Rocket Lab ended the third quarter with a cash position of $442.389 million and with inventories of $114.435 million. That had put current assets at $695.499 million. Current liabilities added up to $269.199 million, which was mostly contract liabilities. There was no short-term debt at all. The current and quick ratios closed out that quarter at 2.58 and 2.16 respectively.
Total assets amounted to $1.153 billion, including $132.602 million in goodwill and other intangibles. At 11.5% of total assets, in my opinion, this is not an issue. Total liabilities less equity came to $733.194 million, including $46.915 million in regular long-term debt and $344.865 million in convertible senior notes. The company has enough cash on hand to handle all of that debt. Only potential drawback One does have to be fully cognizant that at some point, those convertible notes could have a dilutive impact on the stock and the recent run likely increases that probability of something like that happening.
New News
Early Tuesday morning, Rocket Lab USA announced that it had successfully launched a suborbital mission in November on behalf of the U.S. Department of Defense to test hypersonic technology. For the readers who may be behind on this story, hypersonic technology is a broad term for weapons delivery systems that travel at speeds in excess of Mach 5 and operate in a unique aerodynamic regime characterized by extreme temperatures and complex air flows. These weapons are considered to be immune to modern defenses, and, unfortunately, the U.S. military is still considered to be behind both the Chinese and Russian militaries as far as developing reliable hypersonic delivery is concerned.
Rocket Lab USA's mission provided test launch capabilities under the "Multi-Service Advanced Capability Hypersonic Test Bed project. The contracting agency was the Naval Surface Warfare Center for the U.S. Department of Defense Test Resource Management Center.
Rocket Lab was apparently able to showcase a new suite of cutting-edge developments optimized for these specific tests delivering vastly increased payloads. The firm had designed, manufactured, assembled and integrated the experimental equipment on an accelerated timeline understanding that6 catching up in this area is a necessity.
Additionally, two weeks ago, the Biden Administration awarded a grant of $23.9 million to RocketLab USA under the CHIPs Act to create a more robust and resilient supply of space grade solar cells that would be used to power both spacecraft and satellites.
What Now?
You know I hate violating my net basis, but with this one, I see no choice if I want to grow the position. Our net basis stands at $5.05, which even after the drawdown puts us up almost 350%.
Readers will see that RKLB broke sharply out of that Andrews' Pitchfork model that I showed you last month. Relative Strength no longer stands in technically overbought territory. It's early, but the stock could be setting up what may end up being a bearish head and shoulders pattern. On top of that, below the chart, readers will see a now bearish looking daily Moving Average Convergence Divergence indicator.
Within that daily MACD, the histogram of the 9-day exponential moving average has gone negative, while the 12-day EMA has crossed under the 26-day EMA. We may get a chance to add to this long position lower or make a sale up here if that's what you're thinking. I am thinking of adding in between that 21-day EMA (currently $21.30) and the 50-day simple moving average (currently $15.10).
I don't think I need to even act unless the stock falls to those levels. I'll still panic (intentionally and planned, so it's not really a panic) if that 50-day line breaks. My Target price? Currently $33, and that's predicated on a new high being created that launches an algorithmic response. More than likely, the time is here to manage this position.
At the time of publication, Guilfoyle was long RKLB equity.
