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Time to Buy or Sell Defense Stocks?

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When the recent U.S. election sent up a surprise Presidency, we got this old bull market to spring back to life.

Here are 3 key parts to the latest rally.

Number One--

A Republican President and Republican control of both the Senate and the House of Representatives means the chance of passing a spending bill is much higher. That led scores of covering analysts to raise EPS estimates on companies that can benefit – in particular from more Infrastructure or Defense spending. There may also be less regulation on the Health Care and Financial sectors.

Number Two--

Higher expected spending and lower taxes by the soon-to-be-installed federal government has been the main driver behind recent bond investor transactions. They sold their U.S. Treasuries to buy stocks or move to cash or alternatives. T-bond selling pushed risk-free federal government bond interest rates sharply higher. Remember, T-bond prices and interest rates move in opposite directions.

However, there is a bearish Number Three--

The Equity Market sky is not clear to the horizon. Respected market strategists have spoken up with meaningful concern. This fearless stock market looks to be underestimating the possibility of President Trump rattling risk markets during his 4-year term. He remains unpredictable.

There are big GDP growth negatives to higher long-term bond rates. Think about the pace of house buying and the effects of a stronger U.S. dollar. There are also negatives to less regulation. Recall the wonderful poorly regulated securitized mortgage markets in 2006.

The best Bull example in this recent phenomenon may be Defense stocks.

The 13-company strong Zacks Aerospace-Defense industry has been bid up in recent trading, gratis the widely covered Trump rally. We can thank the ETF industry for the broad, ebullient share price pick-up.

However, Industry EPS fundamentals help keep these shares aloft, too. The current Aerospace-Defense Zacks Industry Rank comes in at a terrific #35 out of 265, rising +12 industry spots more in recent weeks. Covering analysts raised their estimates 40 times during this time period, with only 5 cutting estimates. That’s the ‘Number One’ Trump rally evidence I'm talking about!

Should you buy now?-- Not If Zacks Valuation scores are too high on the given stock.

I say sell and take profits on the largest Defense players if they get poor Zacks Value scores like D. Once significant profit taking occurs, you might want to dip a toe in the water.

Bone up on the smaller less-known Aerospace-Defense players. Find one that looks relatively more attractive.

Here are 3 Zacks Top-Ranked Defense stocks and their quantitative stories.

General Dynamics (GD - Free Report) ):

This stock carries a Zacks #2 Rank (BUY). The shares are NOT attractive in terms of a long-term Zacks VGM score. That comes in at a D, granted by a B in Zacks Value and a D in Zacks Growth. The forward P/E is 17.59. Shares currently trade around $170 after a swift Trump election run-up from around $150.

This is a huge military service contractor, with $52.4 billion in market capitalization. 10 analysts follow this large cap stock. 7 have raised their 2016 estimates recently. None have cut them. There is a 1.77% annual dividend.

Annual estimates have gone up very slightly. 2016 EPS has risen minutely from $9.76 to $9.78 over the last 30 days. 2017 EPS has risen slightly too, from $10.10 to $10.14. The average of the last 4 EPS surprises has been +5.5%. The last EPS surprise was +4.6%. This company reports again on Jan. 25th.

General Dynamics Corp.'s primary businesses focus is on shipbuilding and marine systems, business aviation, information systems, and land and amphibious combat systems. Each of these businesses involves design, manufacturing and program management expertise, advanced technology, and integration of complex systems.

The primary customers for the company's businesses are the United States military, the armed forces of allied nations, other government organizations and a diverse base of corporate and industrial buyers.

Headquarters is in Falls Church, VA, which makes for a quick 15-minute drive to the Pentagon.

Northrup Grumman (NOC - Free Report) ):

This stock carries a Zacks #1 Rank (STRONG BUY). But these are NOT attractive in terms of a long-term Zacks VGM score. The VGM score comes in at an F, granted by a D in Value and a D in Growth. The forward P/E is 21.18. Shares currently trade around $250 after a swift Trump election run-up from around $220.

This too is a huge military service contractor, with $43 billion in market capitalization. 9 analysts follow this large cap stock, and 6 have raised their estimates recently. None have cut them. There is a 1.45% annual dividend.

Annual estimates have gone up very slightly, but there is not year-on-year growth in the game. 2016 EPS has risen minutely from $11.72 to $11.74 over the last 30 days. 2017 EPS has risen more notably, from $11.64 to $11.98. The average of the last 4 EPS surprises has been +8%. The last EPS surprise was +7%. This company reports again on Jan. 26th.

Northrop Grumman is a high tech defense company. It provides innovative solutions in systems integration, defense electronics and info tech for its U.S. and international military, government and commercial customers. It serves as a prime contractor, principal subcontractor, team member or preferred supplier.

Headquarters is also in Falls Church, VA.

Engility Holdings ): This stock carries a Zacks #1 Rank (STRONG BUY) riding along with an attractive long-term Zacks VGM score of A, granted by a B in Zacks Value and a B in Zacks Growth. The forward P/E is 23.45 with a nice Price to Sales ratio of 0.65. Shares currently trade around $37.50 after a swift Trump election run-up.

This is a much smaller military service contractor, with $1.4 billion in market capitalization. 6 analysts follow the stock, and 4 have raised their estimates recently. None have cut them. There is no annual dividend.

Unlike the big defense companies, this company can provide substantial EPS growth. 2016 EPS has risen from $1.42 to $1.61 over the last 30 days.  2017 EPS has risen too, from $2.03 to $2.12. The average of the last 4 EPS surprises has been a substantial at +23%.  The last EPS surprise was +37%. The company reports again on March 2nd.

Engility Holdings, Inc. is engaged in providing government services in engineering, professional support and mission support to customers in the U.S. Department of Defense, Federal civilian agencies and allied foreign governments. Its core offerings include SETA Support, Professional Services, Education and Training, Operational Support, Logistics, International Capacity Development and Linguistics.

Engility Holdings, Inc. is headquartered in the more suburban Washington DC town of Chantilly, VA.


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