High-Flying Aviation Stock Faces Turbulence for Small-Cap Funds

High-Flying Aviation Stock Faces Turbulence for Small-Cap Funds

A high-flying aviation stock that has been a standout performer for several small-cap funds now appears to be faltering, creating challenges for these funds to maintain their robust performance. Shares of FTAI Aviation (FTAI) dropped nearly 8% on Wednesday, trading around $96. This marks the fourth decline in five days and the worst two-day stretch since August 2, 2022, when it fell 9.9%, according to Dow Jones Market Data.

Impressive Gains Amid Setbacks

Despite recent setbacks, FTAI remains impressive, up 107% year-to-date and 203% from its 52-week closing low of $31.74. These gains have enabled a select group of small-cap funds to outpace the market this year. This achievement is uncommon in the small-cap segment. Out of nearly 400 actively managed small-cap funds tracked by LSEG, only eight are outperforming the S&P 500 (SPX). These funds are not from well-known managers like T. Rowe Price or Fidelity.

Despite recent setbacks, FTAI has shown impressive growth, up 107% year-to-date and 203% from its low, according to Barron’s News.

Risky Bets with Big Rewards

The funds succeeded by taking significant risks and achieving substantial gains. All eight funds have at least two stocks among their top 10 holdings that have tripled in value. Super Micro Computer (SMCI), up 264%, and EverQuote, up 215%, are among these notable names. FTAI stock is a recurring presence, among the top three holdings in five of the eight funds.

FTAI’s Role in Small-Cap Funds

FTAI, which leases and sells aircraft engines, is a typical stock for small-cap managers. It is the second-largest holding in the iShares Russell 2000 exchange-traded fund, albeit representing just 0.4% of that fund. The market-beating active managers, none of which have more than 110 positions, hold significantly more concentrated stakes in FTAI. The stock constitutes 4.9% of Hood River Small-Cap Growth’s portfolio and 4% of John Hancock Small Cap Dynamic Growth’s. Hennessy Cornerstone Growth Investor is the only small-cap fund among the group of eight to outperform the S&P 500 without owning FTAI as of June 30.

Benefiting from Industry Trends

While FTAI may not be as glamorous as Nvidia, whose stock surged 202%, it has benefited from the travel boom. This boom has led to increased demand for aircraft, capitalizing on Boeing’s challenges and manufacturing issues in the airline industry. These factors helped FTAI significantly surpass Wall Street forecasts last year, earning $212 million. Analysts predict profits to surge another 50% over the next two years. FTAI’s market cap began this year at $4.65 billion and closed Tuesday at $10.5 billion.

The Dawn of the AI Arms Race A New Era of Technological

The Dawn of the AI Arms Race A New Era of Technological

The dawn of the AI arms race The artificial intelligence arms race, once focused on creating colossal models trained on vast datasets…

Valuation Concerns Arise

Similar to Nvidia, which has driven the returns of many large-cap funds, the question remains whether FTAI can continue rising at its current valuation. It is currently trading at about 41 times next year’s estimated profit, up from about 22 times at the start of the year. Wall Street is becoming cautious about its valuation. Wolfe Research, for instance, downgraded the stock to a neutral rating, citing valuation concerns. “Following a big run in the stock, we are running out of valuation runway even with anticipated potential positive revisions,” wrote analyst Myles Walton in a note on Tuesday.

Analyst Perspectives

While most analysts surveyed by FactSet have Buy ratings on the stock, it has exceeded the average price target of $93.40. Citi’s Stephen Trent, for example, reiterated a Buy rating and $99 target on the stock in mid-June when it traded around $84. Now that it’s back in the $90s, it seems to be settling into Wall Street’s comfort zone. Its decline could adversely affect small-cap funds that had relied on it to maintain their performance.

Enroll today for a remarkable 3-year membership to Bloomberg News and The Wall Street Journal, saving 77%. Imagine the wealth of knowledge from combining these potent financial subscriptions—a wellspring of priceless expertise awaits!

Call Now Button