The Top Guns of Defense: Weapons of Mass Wealth
In today’s digitally connected global village, the most valuable commodity is information. That’s why long-time friend and colleague Richard Aboulafia, one of the most influential aerospace/defense analysts in the world, charges corporate and government clients thousands of dollars for an hour-long consultation.
But friendship has its perks. Earlier this week, I obtained an hour of Richard’s expensive insights for the price of a Sam Adams and a cheeseburger.
Richard currently serves as vice president of analysis for the Teal Group, a research group based in Fairfax, Virginia. Now that Congress has finally passed a budget, I asked him for his latest take on the aerospace/defense industry, with an emphasis on what it all means for investors. As Richard told me between bites of his lunch:
“Defense is taking over from commercial aerospace as the real growth driver in this industry. Export markets are very strong, primarily driven by tensions in the Mideast, Asia, and Europe. Global military spending is heading upwards, a trend that will continue for the rest of the decade. A key beneficiary of this increase will be air power.”
U.S. defense procurement already has gotten a big boost during Trump’s administration, reflected by the $1.1 trillion spending bill for fiscal 2017 that was passed by Congress last week. The White House won $15 billion in additional funding toward Trump’s repeated promises to rebuild the military.
As indicated by the chart below, robust Pentagon funding provides powerful tailwinds that should make defense stocks resistant to market and economic setbacks:
Source: Office of Management and Budget
The Big Five…
You face many investment risks in 2017. Jim Pearce, chief investment strategist of PersonalFinance, says a stock market correction probably lies ahead this year. Cyclical economic patterns also suggest that the aging, eight-year-old recovery is about to run out of steam. Another risk is inflation, which in recent months has shown signs of stirring.
Jim points out that aviation’s technological innovation will help it weather the rocky days to come, even against the reemergence of inflation:
“Computers have been used for decades to optimize the design of planes so that they require less steel, carbon and plastic, and use less fuel. As a result, profits for airplane builders and airlines are less susceptible to wide swings in commodity prices.”
This confluence of favorable factors makes America’s aerospace/defense contractors one of your best bets now. In order of annual sales generated by defense, the Top Five players are: Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), Northrop Grumman (NYSE: NOC), Raytheon (NYSE: RTN), and General Dynamics (NYSE: GD).
Think of these five companies as weapons of mass wealth. They make the jet fighters, drones, missiles, and other defense systems that the U.S. and foreign nations increasingly demand in a tumultuous world.
According to the non-partisan Congressional Research Service, a division of the Library of Congress, the Top Five’s biggest clients are located in hot spots currently in the news, such as the Korean peninsula, the Asian subcontinent, and the Middle East.
Global defense spending rose in 2016 to $1.57 trillion, ushering in what’s expected to be an entire decade of booming military expenditures in the U.S. and around the world, according to the annual Jane’s Defense Budgets Report.
Jane’s annual report examines and forecasts defense spending for 105 countries. Highlights from the latest report:
- The U.S. defense budget represents about 40% of the total global defense budget. Since the terrorist attacks of 9/11, over $9.35 trillion has been allocated to U.S. defense spending.
- India in 2016 overtook Saudi Arabia and Russia to become one of the top five defense spenders globally for the first time.
- Western Europe’s fight against terrorism and fears of an expansionist Russia should add approximately $10 billion to defense budgets across the region over the next five years.
The takeaway: Aerospace/defense stocks are reliable generators of long-term profits, as well as hedges against corrections, recessions and inflation.
Let’s take a quick look at the world’s five biggest defense firms, all of which are based in the United States.
Lockheed Martin, Boeing, and Northrop Grumman: As major manufacturers of military planes and combat jets, these three behemoths monopolize the global military aircraft business. They’re large-cap blue chips that are positioned to reap the lion’s share of the spoils.
Raytheon: The company’s engineering expertise in sensors and guidance systems continues to be coveted by America’s top brass and allies around the world. Raytheon is the largest missile maker in the world and a major play on the growing use of drones.
General Dynamics: GD provides combat vehicles, surface ships, submarines, maintenance repair and overhaul for military aircraft, and information technology solutions for the military services.
ATRO’s wild ride…
While I’m on the topic of aerospace/defense, now’s a good time to answer this recent letter to the editor on Astronics (NSDQ: ATRO), a small-cap maker of aerospace electronics for military and commercial customers:
“Any thoughts on the price action of ATRO after earnings this week? I know it’s thinly traded and not widely followed but I was surprised by the apparent good response to earnings and then a sharp reversal the next day.” — Richard F.
I recommended ATRO in my article in the March 22 issue of our flagship publication, Personal Finance (“Astronics’ Triple Boost From Defense”). I’m still bullish on the stock.
The fact is, Astronics initially spiked because of a stellar earnings report. It’s true that ATRO traded on atypically high volume on Friday, May 5. As Richard witnessed, the stock lost more than 7% to close at $30.82 (after jumping more than 7% the previous day).
On Friday, 421,870 shares traded hands on 3,244 trades. However, over the last month, the stock averaged a daily volume of only 162,827 shares a day. Keep in mind, when an inherently strong stock such as ATRO undergoes wild up-and-down spikes in trading volume, it could be perceived as a bullish signal.
With a modest market cap of $898.3 million, ATRO tends to get little notice from analysts, but a spike in volume indicates that the stock has landed on Wall Street’s radar. This greater market awareness could be setting the table for a significant upward trajectory for the stock. Higher volume also creates a level of support for further price advances.
Jim Pearce added Astronics to the PF Growth Portfolio on March 17. I would view Friday’s plunge as a buying opportunity. As of this writing, the stock price hovers at around $31. My projection is that Astronics is on track to generate year-over-year earnings growth this year of at least 15%.
One reason that I particularly like Astronics is its status as a small cap stock, which gives it considerably more room for growth than its mega-cap brethren.
Got any questions or comments? Drop me a line: firstname.lastname@example.org — John Persinos
Jim Fink’s million-dollar secret…
Jim Fink, chief investment strategist of Velocity Trader, has developed a proprietary trading methodology that multiplies the gains of regular stocks. He can take regular stock movements of 8%, 17%, or 34% and exponentially leverage them to generate profits of 100%, 300%, or even 800%.
When Jim Fink first launched his top-tier trading service Velocity Trader, he was confident enough to issue this challenge to readers:
“If I don’t deliver 24 triple-digit winners in the next year… I’ll cut you a check for $1,950.”
Sound crazy? Well, he has already followed through. In less than a year, Jim racked up twenty-four triple-digit winners, along with more than thirty double-digit winners.
As Jim explained it to me:
“I don’t trade regular stocks because of the high costs. What I’ve found is that I’m able to earn the same, or more, in profits by spending a fraction of the investment costs of common stocks.
Think about it: a rate of return is the dollars of profit divided by the dollars at risk. So, if you can minimize your dollars at risk, and then make the same dollars of profit, your potential rate of return is vastly higher.”
Jim made himself a multi-millionaire from his system. Want to know his secrets? Click here for his presentation.