In what can arguably be called the most startling electoral outcome in modern American history, Donald Trump’s victory last week led to an initial meltdown only to bounce back strong later -- extinguishing pre-market fears of global sell-offs. No doubt, the unexpected rally in the market was as surprising as the victory itself.
Coming to the Aerospace and Defense sector, the Trump win has been cheered by the stocks in this space. This is reflected by the 7% gain by both the S&P 500 Aerospace & Defense (Industry) Index and the Dow Jones U.S. Aerospace & Defense Index while the S&P 500 climbed only 1.1% in the Nov 9–11 period.
In fact, the promises of greater spending and expansion of troops that Trump had made in his pre-electoral campaign have won over defense majors. However, at the same time, Trump had hinted at a cutback in defense spending, particularly in Japan and South Korea, which played spoilsport.
Meanwhile, a quick review of the past reveals that the Conservative Republican Party has, in general, advocated in favor of increased military spending.
Considering these bullish factors and the latest request by President Obama for an additional $11.6 billion in supplemental war-related funding, reflect a possibility of a higher rally by the defense stocks, in the near future.
Factors Boosting Defense Stocks
Although Trump’s victory provided a boost to the defense sector, the intrinsic strength of the stocks in this space is worth a mention. We have discussed a few key points briefly below:
With geopolitical uncertainty on the rise, developed as well as emerging nations have increased their defense spending manifold in the last decade. The crisis has been particularly felt with the meteoric rise of the Islamic State of Iraq and Syria (ISIS).Obviously, the direct beneficiaries of such global crisis are the aerospace and defense majors of the U.S. – the most successful ones in the world.
Moreover, demand for more fuel-efficient aircraft, a growing international market and increasing application of unmanned aircraft in warfare today have driven sales in these sectors.
Also, low interest rate in the U.S. for the past few quarters has also been favoring the defense stocks, which need substantial funding for the production of aircraft and defense equipment.
With the U.S. fiscal 2016 bill emphasizing on cyber programs, cyber-oriented work is expected to yield solid growth. Consequently, defense biggies like Raytheon Company (RTN - Free Report) which develop various cybersecurity and special mission programs will be benefitted.
Apart from these factors, the landmark $38 billion deal that the U.S. signed with Israel in Sep 2016 for 10 years reflects a crucial decision on the nation’s part to substantially boost its defense sector. Per the terms of the contract, Israel has to spend as much as $1.2 billion of the $3.8 billion allotted to it per year on the advanced military equipment that only the U.S. can provide.
Among other defense primes, The Boeing Company (BA - Free Report) and Lockheed Martin Corp. (LMT - Free Report) are expected to gain the most from the deal. Per this deal, Israel will receive Lockheed’s 33 F-35 jets and Boeing’s 10 F-15 aircraft.
4 Stocks to Pick
With the factors working in favor of the defense sector, it is time investors consider a few top-performing stocks from this space. We have picked four defense stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy), which have experienced a share price hike of more than 4% in last five trading sessions, compared to the S&P 500 Index’s 3.6% over the same time frame.
Arotech Corporation : This Zacks Rank #1 company offers quality defense and security products including multimedia interactive simulators/trainers and advanced portable power solutions. Its share price rose 30.6% in the last five trading sessions while it posted a positive earnings surprise of 700.00% in the last quarter.
Engility Holdings, Inc. (EGL - Free Report) : This Zacks Rank #1 company provides integrated solutions and services for the global defense sector. The company gained 35.2% in the last five trading sessions and has reported a positive earnings surprise of 36.8% in the last quarter.
Northrop Grumman Corporation (NOC - Free Report) : This company provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas. Share price of this Zacks Rank #1 corporation rose 9.7% in the last five trading sessions, while the company delivered a positive earnings surprise of 7.5% in the last quarter. You can see the complete list of today’s Zacks #1 Rank stocks here.
Hexcel Corp. (HXL - Free Report) : This Zacks Rank #2 company offers structural materials for use in commercial aerospace, space and defense, and industrial markets. Its share price rose 4.7% in the last five trading sessions, while it posted a positive earnings surprise of 6.6% in the last quarter.
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