Anticipated Military Buildup: Good News For High Flying Defense Stocks – Seeking Alpha

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Defense Stocks

Big Defense Stocks Have Been On Fire

It appears that forced spending cuts have not hurt defense contractors. Are investors pricing in more spending on a military build-up by a President Clinton or President Trump?

Raytheon (NYSE:RTN), Northrup Grumman (NYSE:NOC) and Lockheed Martin (NYSE:LMT) hit all time weekly highs in May. General Dynamics (NYSE:GD) is close. The Year to Year charts below tell the story.

Raytheon Year to Year Chart

Raytheon’s 52wk Range is 95.32 – 132.43. It closed today at 129.34, up 26% above the low. Raytheon trades with a Beta of 0.64.

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Northrop Grumman Year to Year Chart

Northrop’s 52wk Range is 152.31 – 218.84. It closed today at 212.72, up 28% above the low. Northrup trades with a Beta of 0.83.

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Lockheed Martin Year to Year Chart

Lockheed’s 52wk range is 181.91 – 245.37. It closed today at 240.07, up 24% above the low. Locheed trades with a Beta of 0.65.

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General Dynamics Year to Year Chart

General Dynamics’ 52wk range is 121.61 – 153.76. It closed today at 144.62, up 15% above the low. General Dynamics trades with a Beta of 0.72.

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As a group, The four defense contractors hit a recent low point around February of 2016 and have been rising strongly since.

Winning Stocks for a Decade

The four companies listed above have been winners for the last decade. Ten year charts tell the story

Northrop Grumman

Northrop share value is up by 224%.


Courtesy of the Author

Raytheon

Raytheon Shares is up 184%.

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General Dynamics

General Dynamics is up 123%.

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Lockheed Martin

Lockheed sports is up 184%.

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A turning point is noted for 2013 when all began an accelerated share value rise.

Arms Sales Force
U.S. arms companies have been profiting from the unending warfare in the Middle East and elsewhere. The (DSCA) U.S. Defense Security Cooperation Agency is the Pentagon office responsible for coordinating arms agreements between foreign buyers and American defense contractors.

This is big business for the U.S. arms industry, but it has an important political component that is vital for company profits. The Pentagon may make recommendations, but the actual decisions concerning which countries can buy are made by the secretary of state and then rubber-stamped by the Congress.

Courtesy of the Author

Armed Conflict Across the Globe

Willing buyers seek the wares of U.S. military contractors as ongoing tensions across the globe keep defense dollars flowing in. Europe, the Middle East and Asia have maintained a broad based demand which has been highly profitable for the most technologically advanced weapons systems produced by the U.S.

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Rebuilding America’s Military

U.S. defense companies have been successful at a time when defense cuts have slashed our ability to defend the nation. Now, America must rebuild and in my opinion this momentous decision is inevitable and at hand. It is a Constitutional requirement.

Both Clinton and Trump have stressed the importance of a strong military as part of their presidential campaigns.

Defining the Need

  • Our entire fighting force is shockingly smaller and less prepared. Last year, the Army Chief of Staff stated that military units are at “historically low levels” of combat readiness. This was echoed by the Commandant of the Marine Corps.
  • Air power is diminished at a time when projecting power using air and naval superiority is essential. In 1991, during Operation Desert Storm, America possessed 134 fighter squadrons and 8000 aircraft. What remain are 60 combat squadrons and a total force of fewer than 4000 aircraft. The air force is so depleted that, in Iraq, they cannibalize parts from broken planes to keep others in the air.

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Courtesy of the Author

  • The U.S. Navy is left with 273 deployable ships from the 573 we had in the 1980’s. This is the smallest Navy since 1916 when the county had 245 ships. Sadly, the size of the world’s oceans has not shrunk, most notably, the Pacific. This severely limits our ability to project power abroad and to insure the free flow of commerce.

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  • Our strategic forces, Submarines, long range-bombers and missile silos are approaching the end of their service capabilities. This triad is vital for strategic deterrence as Iran and North Korea test ballistic missiles.

A Security Deficit

The U.S. is running a “security deficit“. It is apparent that America must invest today to be safe tomorrow.

Diversified Defense Investing

I have selected the Fidelity Select Defense and Aerospace Portfolio (MUTF:FSDAX) as one example of a diversified long-term defense investment. Many other ETFs and Defense funds are available and they largely invest in many of the same companies that comprise the sector. The advantage, of course, is safety in diversification.

A profile of the company including all stats and fees is available on Yahoo Finance. The fund invests primarily in companies engaged in research and manufacture or sale of products or services related to defense or aerospace industries.

FSDAX 5 Year Weekly Chart

Courtesy of the Author

The chart shows five year weekly results compared to the S&P 500 index.

Average Annual FSDAX Returns

The table below shows average annual returns across 10 years.

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Comparative 10 Year Returns

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The graphic above shows comparative hypothetical growth of a $10,000 investment between the Fidelity Select Defense Fund and other sectors. As pointed out, the fund is used for illustrative purposes only to show a diversified investment in defense and how it compares to other group sectors. Many diversified defense investments are available.

Take-Away

Looking at the most recent uninterrupted rise of defense stocks listed in this article, I believe investors have already begun to anticipate a future military build-up for the U.S. and are buying into the best companies.

The defense industry has had a decade of good performance and could have a very bright future looking ahead. In my opinion it is a viable sector for investors to consider.

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Additional disclosure: The information and data that comprise the content of this article came from external sources that I consider reliable, but they have not been independently verified for accuracy. Although I reserve the right to express points of view, they are my reasoned opinions, and not investment advise. I am not responsible for investment decisions you make. Thank you for reading and any comments you make.