Space stocks were among the worst-performing stocks in the entire market in 2022, but Bank of America analyst Ronald Epstein said 2023 could be a big rebound year for space investors.

Epstein said the severe underperformance of space stocks last year was driven by several specific factors, including negative sentiment toward SPACs, lack of profitability and limited institutional investor interest.

Bullish Catalysts Ahead: However, Epstein says space stocks should enjoy several bullish catalysts this year, the most compelling of which is strong demand for space technology that may open the door for ongoing consolidation.

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In the second half of 2022, several major deals were announced, including Advent International acquiring Maxar Technologies Inc (NYSE:MAXR) and Lockheed Martin Corp (NYSE:LM) investing $100 million in Terran Orbital Corp (NYSE:LLAP).

"We continue to see the space industry as ready for consolidation given attractive valuations and liquidity concerns at smaller space companies," Epstein said.

How To Play It: Epstein said he expects bifurcation between top performers and bottom performers in the space industry in 2023. He expects appetite for growth stocks will return in the coming months, but only for growth stocks with viable business models. Companies with tangible strategies have tremendous potential upside following the 2022 sell-off, while others may remain grounded.

Bank of America's two Buy-rated space stocks heading into 2023 are Astra Space Inc (NASDAQ:ASTR) and Rocket Lab USA Inc (NASDAQ:RKLB).

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Benzinga's Take: It's still extremely early to pick one or more long-term winners among stocks with exposure to the space race. Investors should expect more extreme volatility in the space group in the coming years and fully understand the risk that comes along with investing in companies this early in the development stage.

Image by Arek Socha from Pixabay