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The Global Security Fund retreated by 1.65 percent (S share class) and 1.70 percent (R share class) during January, which was worse than the comparison index MSCI World TR, which rose by 0.72 percent.
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 within this broad index, Virgin Galactic's price rise was particularly strong, up over 100 percent in the submonth. With a "short interest" of over 29 percent, the company is a popular short-selling target among hedge funds. That made the company likely to become a target for Reddit's Wallstreetbets Group, however this is only speculation. With a large percentage of popular shorted companies up so significantly 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 will likely 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 one more 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 cyber security companies and the same pattern played out in the cyber security sector as in the space sector where the share prices of weaker companies raced away. Blackberry's share price went from CAD 8.5 to over 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 retreated by 4.4 percent.
January was an active month in terms of quarterly reports – over 30 percent of the portfolio's companies reported. The reports were in line, or better than expected, but the price trend was 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 7.36 billion. Flir, which is one of Port Oil'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 much of 2020, but the news surrounding the Teledyne acquisition caused the price to rise just under 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 results were 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 in the coming year, but the company is positioned well 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.
Cyber security company Crowdstrike, considered one of the industry's best and a clear favorite in the endpoint detection segment, was up 3.7 percent, benefiting the fund by 0.25 percent. Leidos, another cyber security company, which does not produce its own products but works closely with the US government, releases its report in February. As often happens after a contract procurement, the contract losers contest 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 7 billion procurement was that there was no counterargument 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, which reported on January 28. The company reported slightly better sales than expected but slightly weaker earnings, however, the result was largely in line with expectations. The company's forecast for the coming year is better than before and there is a USD 147 billion 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 plane, but the company has attractive growth in the space segment and has strong growth in the hypersonic area. Lockheed Martin also announced that it had acquired Aerojet, which will provide major synergies in the space area. 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-over-year. The company has significant exposure to the commercial aircraft industry, which acts as a headwind and affects the management's forecast for the coming years, where the company believes in growth of 3 to 5 percent. Despite the forecasts, the company beat the market's expectations both in terms of 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 negatively affected the fund by 0.4 percent.
The cyber security company FireEye releases its report next month and after a very strong December, when the company was up over 50 percent, the price retreated by 7.3 percent, which negatively affected the fund 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 Jan. 28 beating expectations for both sales 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, which is around 4 percent. The share was down 4.3 percent, which affected the fund negatively by 0.2 percent.
The trend for growth in cyber security continues and the companies in this segment benefit from increasing share prices. The traditional security companies have a significant exposure to heavier production, which has been negatively affected during the Covid-19 pandemic. The space investments from these companies are increasing and the companies are positioning themselves strongly for the future.
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