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Can The Trump Team Shoot Straight On Defense?

Jimmy Breslin, the legendary Pulitzer Prize-winning journalist who died last week, wrote a novel The Gang That Couldn’t Shoot Straight, about bumbling gangsters who couldn’t get anything right. The 1969 book was a big bestseller, the 1971 movie version was a hit… and that title lives on forever.

Ever since the novel came out, its title has appeared in countless headlines whenever a group screws up. In media commentary these days, I’m increasingly seeing Breslin’s title applied to the Trump administration. In fact, I used those words for my headline today.

As the markets continue their downward slide in recent days, it’s apparent that President Trump’s missteps are disillusioning Wall Street. The spectacular demise of “Trumpcare” last Friday certainly tarnished Trump’s carefully cultivated image as a shrewd dealmaker.

It raises the question as to whether the much-ballyhooed aerospace/defense boom will really happen, or if that’s a mirage, too.

Twilight time for defense expectations?

 

Jim Pearce, chief investment strategist of Personal Finance and director of portfolio strategy for Investing Daily, urges skepticism about any investment deemed a “Trump stock.” As Jim puts it:

“The product pushers on Wall Street love having a catchy phrase that helps them sell anything hot in the market, and right now that phrase is ‘Trump stocks.’ This loosely defined group of companies supposedly will benefit from the president’s plans to expand the economy, and yes, a new set of winners and losers will emerge as the new administration shifts direction away from the Obama years…

You should avoid jumping blindly into any company branded as a Trump stock, and as you might expect, the traditional GOP stronghold of defense companies leads this coterie of stocks.”

Market expectations of a huge Trump defense increase look less likely to happen as time goes by. For starters, Trump’s proposed budget would need to get 60 Senate votes, because it violates the Budget Control Act (BCA).

Given that Trump’s budget pays for a defense increase by slashing programs popular with Democrats, it won’t get 60 votes. Even some Republicans don’t like Trump’s proposed budget because they view it as profligate.

What’s more, Trump’s appointment of Mick Mulvaney as director of the Office of Management and Budget is a complete mystery. As a hardcore Tea Party guy, Mulvaney objects to funding defense procurement through the off-budget Overseas Contingency Operations account, which is the only way to get around BCA caps.

Meanwhile, the collapse of Trumpcare last Friday has challenged the narrative of Trump as a dealmaker who can reconcile competing interests. Coalition building is what’s needed here with the defense budget. Instead, Trump charged in with a plan to grow defense by $54 billion by cutting the same amount from non-defense. That’s a good way to create adversaries.

For further insights, I turned to one of the savviest aerospace/defense insiders I know: Richard Aboulafia, vice president of analysis at the Virginia-based consultancy Teal Group.

More compromise, less bluster…

I’ve covered the aerospace/defense sector for more than 30 years. Richard is a colleague and friend who has attended countless international air shows with me. The Military Times ranks Richard as one of the most influential defense analysts in the world. Top corporate CEOs pay Richard a lot of money for his advice.

Last Saturday night, I knocked on the door of Richard’s home in Washington, DC and, with a bottle of Argentine Malbec as a bribe, got him to reveal his thoughts about the future of defense spending under President Trump. As Richard told me:

“To get past the BCA caps, Trump will need a completely different approach, one that involves more compromise and much less bluster. Hopefully, they’ll find a way to work with everyone — Democrats, the Freedom Caucus, etc. — and increase defense without raiding other accounts, especially ones that are also vital for national security, such as the State Department and the Coast Guard.

Of course, this approach will increase deficits and the national debt. But this has always been the plan. Trump promised a huge increase in defense spending, a very large infrastructure spending package, and big tax cuts too, a combination that was bound to increase deficits and the debt. The alternative is to stick with the Obama defense budget plan. And again, seeing how the pattern played out with health care, the Obama status quo might be the end result for defense too.”

The upshot for investors: Aerospace/defense will continue to thrive under Trump, but don’t think the prosperity will spread to all players. Instead of a broad-brush approach, you must conduct careful stock picking.

That’s why I like small-cap aerospace/defense stock Astronics (NSDQ: ATRO), which I spotlighted in the February 7 issue: For Bigger Defense Stock Profits, Think Small.

As I wrote at the time, electronics supplier Astronics is “large enough to withstand market turmoil but small enough to provide market-beating appreciation. It’s a ‘Goldilocks’ stock that occupies the sweet middle ground.”

Astronics also is diversified and boasts major clients in the commercial aviation sector. The company should prosper in 2017 and beyond, whether the Trump gang shoots straight on defense or not.

Got a question about aerospace/defense stocks? Drop me a line: mailbag@investingdaily.com — John Persinos

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