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Monday Mailbag: Aerospace Boom, Liquid Gold, Seoul Survivor… and More

By John Persinos on April 17, 2017

As I reviewed the latest influx of letters, it occurred to me that I have more extensive written correspondence with Investing Daily readers than with members of my own family.

In today’s smartphone age, most people would rather communicate via terse texts. My Millennial daughter is among the worst offenders. Asking her to write me an email with complete sentences is like asking Superman to hug a piece of Kryptonite.

Hence my gratitude, dear readers, for the effort you make in sending cogent emails to our mailbag. Letter writing, even in electronic form, is an increasingly neglected art that still serves an important function. Let’s get to this week’s letters.

Lockheed Martin’s sky-high bet…

“Lockheed Martin seems to be a good defense stock that should benefit from Trump’s military buildup. But I’m worried that its acquisition of helicopter-maker Sikorsky will weigh on the stock. What’s your view of Sikorsky and its contribution to LMT’s prospects?” — Mitch R.

Mitch, you must be listening to the naysayers who argue that aerospace giant Lockheed Martin overpaid for Sikorsky and that the helicopter maker is a drag on the parent company’s performance. But they’re wrong.

I’ve covered aerospace/defense for more than 30 years and I happen to know a lot about Connecticut-based Sikorsky Aircraft. I’ve not only visited Sikorsky’s various facilities several times but I’ve also flown its helicopters. (Disclaimer: I don’t own any Lockheed Martin stock.)

When Lockheed Martin paid $9 billion in 2015 to United Technologies (NYSE: UTX) for Sikorsky, some analysts clucked their tongues that LMT had overpaid and that Sikorsky would have been a better fit with Textron (NYSE: TXT), the owner of Bell Helicopter.

However, as Donald Trump gets ready to boost defense spending, the Sikorsky acquisition looks smarter and better timed than ever.

In addition to many civilian models, Sikorsky makes widely used military helicopters, notably the U.S. Army Black Hawk and variants for other services (e.g., the Seahawk for the U.S. Navy). The Pentagon rightfully views the Black Hawk as a key anti-terrorism tool. Under the more aggressive anti-terror stance that we’re already seeing under Trump, helicopters such as the Black Hawk are almost sure to enjoy huge boosts in funding.

You see, not every defense stock will prosper under Trump. You need to be selective and Lockheed Martin fits the bill. In addition to helicopters, LMT makes lucrative and sought-after combat jets such as the Joint Strike Fighter and the F-16.

The average analyst estimate for Lockheed Martin’s year-over-year earnings growth is 11.6% next year and 8.48% over the next five years on annualized basis. The current dividend yield is a healthy 2.69%. LMT is a strong play on the coming aerospace/defense boom; Sikorsky only makes it stronger.

The money spigot…

I’ve received several queries concerning my April 11 issue, More Precious Than Gold: Why You Should Invest in Water Now. I recommended the First Trust ISE Water ETF (NYSE: FIW) and one of its top holdings, the water utility American Water Works (NYSE: ASK). Some readers asked for additional choices.

“Do you have a couple more favorites in addition to AWK? ETFs are a safer bet but I don’t like the dilution and would prefer to hold a small, select few of the best companies available.”  — Rick B.

“We’re not too big on ETFs and wonder which water stocks you’d consider adding to your long-term portfolio.” — Stuart P.

For the answer, let’s turn to one of the country’s foremost experts on utility investing: Ari Charney, chief investment strategist of Utility Forecaster. As climate change and pollution boost the need for potable water, Ari calls water utilities the equivalent of “liquid gold.”

In addition to AWK, Ari also likes Aqua America (NYSE: WTR). In fact, Ari had the foresight to add both stocks to the UF Growth Portfolio, before water demand exploded. As he explains:

“American Water’s growth continues to be driven by a consolidation strategy coupled with infrastructure upgrades to the country’s aging water system…

Like American Water, fellow Growth Portfolio Core Holding Aqua America is pursuing a growth-via-acquisition strategy in the highly fragmented water and wastewater industries.”

Since Ari added AWK to the portfolio on December 5, 2008, it has racked up a stellar total return of more than 374%. Since he added WTR to the portfolio on August 1, 1994, it has generated a whopping total return of more than 1,842% (yes, a four-digit return; that’s not a typo).

Saber rattling: a two-edged sword…

“The Korean peninsula has been in the news lately, with North Korea testing nuclear weapons and South Korea’s president getting impeached. So it got me to thinking: is South Korea a good contrarian play now?” — Floyd B.

Floyd, I like the way you think. You happen to be right.

South Korea can proudly lay claim to being one of the world’s most compelling success stories, rising from war-torn austerity and harsh dictatorship to democracy and thriving free enterprise in a mere half century.

With an export-dependent economy heavily weighted toward advanced technology, South Korea is poised for enormous long-term growth, yet it usually stays hidden beneath Wall Street’s radar. When the two Koreas do make the news, it’s usually because of a crisis.

North Korean President Kim Jong-un last week threatened the U.S. with a nuclear attack, in response to President Trump dispatching a carrier strike force to the Korean peninsula. The turmoil has weighed on South Korean stocks and that spells opportunity for you. If the history of geopolitical dust-ups is any guide, the intrinsic merits of the punished investments will eventually reemerge.

The best direct play on South Korean prosperity is the iShares MSCI South Korea Capped ETF (NYSE: EWY). This ETF allows you to ride South Korean growth, with fewer risks than individual equities.

With assets of $3.3 billion, the fund seeks to track the investment results of the MSCI Korea 25/50 Index. EWY’s top holdings include Samsung Electronics (OTC: SSNLF), Hyundai Motor (OTC: HYMTF), and KB Financial Group (NYSE: KB).

EWY has racked up a year-to-date total return of more than 16%. The expense ratio is 0.64%, which is reasonable for its class.

Got a question or comment? Shoot me an email: — John Persinos

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