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Worried About Market Turbulence? This Aviation Stock Won’t Lose Altitude

By John Persinos on May 23, 2017

I piloted my first successful helicopter takeoff about 18 years ago, in a Bell Long Ranger while attending the Bell Helicopter Training Academy in Fort Worth, Texas.

I must have had a smug, self-satisfied look on my face, because my pilot instructor pointedly said: “You can’t propel yourself forward by patting yourself on the back.”

I’ve been reminded of those words lately, as the bull market persists in defying gravity. There’s another way to express my instructor’s warning: past performance is no guarantee of future results.

Despite nosebleed valuations and mounting political risks, a dangerous mix of cockiness and complacency continues to drive equities higher. Don’t pat yourself on the back for escaping a crash; take proactive measures now before the broader market falls to earth.

Portfolio hedges sometimes come in unlikely forms. Below, I pinpoint a stock that’s a defensive growth “trifecta.” The stock confers outsized growth potential, protection against a downturn, and even a hedge against inflation.

Chances are, you’ve never head of the company. It’s in the aviation sector and it’s on course to continue its market-beating ways. In a minute, I’ll examine its prospects in greater detail.

But first, for rational context about today’s risks, I turn to former Federal Reserve Chairman Ben Bernanke. At a three-day hedge fund conference last week in Las Vegas, Bernanke asserted that “it always puzzled me” how financial markets have long shown a tendency to be “blasé” about political risks until the “last moment.”

To be sure, our investment strategists have consistently made it clear that the Trump rally has been based more on exaggerated hopes than actual fundamentals. But the recent spike in the CBOE’s Volatility Index (known as the VIX, or “fear gauge”) indicates that Wall Street is finally losing faith in the embattled president’s ability to deliver on his promises.

Jim Pearce, chief investment strategist of our flagship publication Personal Finance, warns:

If my expectation for a stock market correction later this year proves correct, you will be hearing a lot more about the VIX in the months to come. But by the time the VIX has spiked enough in value to indicate that fear of a correction is high, it may be too late to do much about it. My advice: pay attention to the VIX, but don’t let it determine when to take protective action.”

One protective action is to consider high-quality stocks in the booming aerospace/defense sector. In my May 12 issue (The Top Guns of Defense: Weapons of Mass Wealth), I highlighted several military aviation stocks that are poised to not only outperform but also weather the tough times ahead.

This issue, I spotlight a hybrid aviation stock with a global presence in both the commercial and military sectors. It’s a technology play, too.

Come fly with me…

If you’re a regular reader of this newsletter, you know that I love to fly helicopters. That’s a picture of me in the cockpit of a Sikorsky Schweitzer 330, about to take off.

I understand a thing or two about aviation, so believe me when I tell you that the following stock is one of the best growth stories around: AAR (NYSE: AIR), a provider of maintenance, repair and overhaul (MRO) to operators and manufacturers of rotorcraft and fixed-wing airplanes.

Aerospace is booming, but many of the industry’s well-known names offer limited upside. AAR, on the other hand, is set for the sort of market-thumping gains that its more famous peers would envy.

AAR’s stock has been on a tear and the company’s earnings growth projections are exceptional. And yet, the company scarcely gets a mention on CNBC and the other television noise machines. Mechanics in dirty overalls are perhaps considered too boring a topic, but it’s these boring wrench turners on the ground who keep aircraft in the air.

Headquartered in Wood Dale, Illinois, AAR boasts a vast global footprint and ranks as the biggest independent MRO provider in the U.S. by annual man-hours generated.

With a market cap of $1.1 billion, AAR is the largest, publicly traded direct play on MRO growth. However, it’s still small enough to offer greater capital appreciation potential than the gigantic aerospace companies on its client roster.

AAR is something of a rarity. Most major OEMs and airlines have created in-house MRO shops, but AAR is an independent MRO that combines the technological innovation and nimbleness of a small-cap company, with sufficient economies of scale to keep down its costs.

Powerful tailwinds…

AAR enjoys tailwinds from aerospace growth in the commercial, business and military sectors. The company operates in two segments, Aviation Services and Expeditionary Services.

The Aviation Services segment offers aftermarket support, inventory management, and distribution services.

The Expeditionary Services segment provides products and services supporting the movement of equipment and personnel by the U.S. Department of Defense, foreign governments, and non-governmental organizations.

Demand for MRO is particularly strong these days, as air travel enjoys one of its greatest upswings since the end of World War II. The global economic recovery is prompting consumers to open their wallets for plane tickets and airlines are dipping into their coffers to make long-deferred repairs and upgrades.

At the same time, a huge surge in global military spending should benefit AAR. The company’s major clients include Boeing (NYSE: BA), the world’s largest maker of commercial airliners and military planes, and domestic as well as international airlines (see the May 12 issue for more on Boeing).

As stocks in highly cyclical sectors gyrate according to the latest economic data or political crisis, AAR is a “steady Eddy” performer. The equation is simple: without this company’s services, aircraft can’t fly. And while Trump is increasingly unlikely to deliver on health care and tax reform, he already has delivered the goods on a bigger defense budget.

Defense spending remains massive and it’s on a long-term upward trajectory, which shields companies such as AAR from temporary economic downturns and market setbacks. Consistently high Pentagon spending also provides insurance against inflation, which after a long period of dormancy has been rattling its cage again.

The average analyst expectation is that AAR’s year-over-year earnings growth will reach 30.3% in the current quarter, 20.7% next quarter, 29.2% in the current year, and 26.7% next year. My projections call for AAR to rack up five-year earnings growth of at least 18% on an annualized basis.

AAR stock has soared about 44% over the past 12 months, compared to about 16% for the S&P 500. However, with a trailing 12-month price-to-earnings ratio (P/E) of 24, the stock’s valuation is roughly in line with its peers. What’s more, there’s still significant upside left to AAR, driven by its strong earnings potential.

Got any questions or comments? I’d especially like to know how you’ve fared with this newsletter’s recommended trades. Share your stories: mailbag@investingdaily.com — John Persinos


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