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Reasons to Buy Defense ETFs Despite Trump's Twitter Attacks
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Defense stocks and ETFs – an investment area perceived to be a winner in Trump presidency – dropped on December 12 after he tweeted that the cost of Lockheed Martin Corp.’s (LMT - Free Report) F-35 fighter jet – one of most expensive weapons of the U.S. military – is too high. He intends to save "billions" on military purchases once he is sworn into office (read: The Trump Effect: 8 Must-See ETF Charts).
The tweet hurt LMT stock by about 2.5% on December 12. All three aerospace and defense ETFs, namely SPDR S&P Aerospace & Defense ETF (XAR - Free Report) , iShares US Aerospace & Defense (ITA - Free Report) and PowerShares Aerospace & Defense ETF (PPA - Free Report) lost in the range of over 1.1% to 1.3% on the same day (read: Top-Ranked ETFs & Stocks Soaring to All-Time Highs).
Not only Lockheed Martin, The Boeing Company (BA - Free Report) also faced Trump’s ire on Twitter. He had the same criticism of ‘out of control’ expenses for the Boeing Company’s Air Force One replacement project. Still, BA stock had managed to deliver about 10.5% returns since election.
Why Defense ETFs Are Still a Buy
Though Trump’s angry tweet left some investors jittery, there are a few factors that will give investors reasons to use the latest dip as an entry point. We’ll tell you what those reasons are:
Trump Vows to Boost Defense Spending
During his campaign, Trump expressed enthusiasm over lifting defense spending. He strongly criticized the current Democratic government for slashing the defense budget which took the U.S. army to ‘the smallest’ level not seen since 1940.
Trump also urged for 90,000 more soldiers, 100 incremental modern fighter aircraft and 42 additional Navy ships. Most analysts thus bet big on the defense industry and predicted that Trump’s plans would infuse an additional $90 billion to $100 billion to levels set by the Budget Control Act.
Strong Zacks Industry Rank
At the time of writing, the aerospace sector is in the top 19% as classified by the Zacks Sector Rank. Of this, the Aerospace - Defense industry falls in the 10% zone. The PEG ratio of the sector stands at 1.82 versus 2.02 possessed by the S&P 500 ETF iShares Core S&P 500 (IVV - Free Report) (read: 3 ETFs to Buy on Encouraging Aerospace & Defense Earnings).
Of the stocks under question, BA has a VGM (a combination of value, growth and momentum characteristics) score of ‘A’ and a Zacks Rank #3 (Hold) and LMT has a VGM score of ‘B’ and a Zacks Rank #2 (Buy). Such strong valuation should not result in steep selloffs.
Lockheed’s Cost-Saving Plans
Investors should note that, Lockheed Martin management has assumed a cost-saving program to reduce sustainment costs for F-35 by 10% over the next couple of years. This will likely result in cost savings of $1 billion over a five-year period. Also, the F-35 program provides about 146,000 U.S. jobs spread across nearly 45 states. So, investors can expect hard negotiations on the F-35 issue as there is a lot at stake.
Boeing Dividend Hike & Buyback
On December 12, Boeing raised its quarterly dividend by 30% to $1.42 a share. It also approved a fresh $14 billion share repurchase program for in the coming 24 to 30 months. Boeing bought back $7 billion worth its shares this year, marks half of the $14 billion authorization made last year. However, the new buyback announcement substituted the remaining ones and left just $14 billion available for repurchases.
Bottom Line
Given the aforementioned reasons, one can easily understand why defense ETFs are still compelling bets despite the volley of tweets coming from Trump at regular intervals. Though costs seem to be an issue, it is yet unclear how things will shape up in the coming days. Till then, investors can eye Zacks Rank #1 (Strong Buy) ETFs XAR, PPA and ITA.
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Reasons to Buy Defense ETFs Despite Trump's Twitter Attacks
Defense stocks and ETFs – an investment area perceived to be a winner in Trump presidency – dropped on December 12 after he tweeted that the cost of Lockheed Martin Corp.’s (LMT - Free Report) F-35 fighter jet – one of most expensive weapons of the U.S. military – is too high. He intends to save "billions" on military purchases once he is sworn into office (read: The Trump Effect: 8 Must-See ETF Charts).
The tweet hurt LMT stock by about 2.5% on December 12. All three aerospace and defense ETFs, namely SPDR S&P Aerospace & Defense ETF (XAR - Free Report) , iShares US Aerospace & Defense (ITA - Free Report) and PowerShares Aerospace & Defense ETF (PPA - Free Report) lost in the range of over 1.1% to 1.3% on the same day (read: Top-Ranked ETFs & Stocks Soaring to All-Time Highs).
Not only Lockheed Martin, The Boeing Company (BA - Free Report) also faced Trump’s ire on Twitter. He had the same criticism of ‘out of control’ expenses for the Boeing Company’s Air Force One replacement project. Still, BA stock had managed to deliver about 10.5% returns since election.
Why Defense ETFs Are Still a Buy
Though Trump’s angry tweet left some investors jittery, there are a few factors that will give investors reasons to use the latest dip as an entry point. We’ll tell you what those reasons are:
Trump Vows to Boost Defense Spending
During his campaign, Trump expressed enthusiasm over lifting defense spending. He strongly criticized the current Democratic government for slashing the defense budget which took the U.S. army to ‘the smallest’ level not seen since 1940.
Trump also urged for 90,000 more soldiers, 100 incremental modern fighter aircraft and 42 additional Navy ships. Most analysts thus bet big on the defense industry and predicted that Trump’s plans would infuse an additional $90 billion to $100 billion to levels set by the Budget Control Act.
Strong Zacks Industry Rank
At the time of writing, the aerospace sector is in the top 19% as classified by the Zacks Sector Rank. Of this, the Aerospace - Defense industry falls in the 10% zone. The PEG ratio of the sector stands at 1.82 versus 2.02 possessed by the S&P 500 ETF iShares Core S&P 500 (IVV - Free Report) (read: 3 ETFs to Buy on Encouraging Aerospace & Defense Earnings).
Of the stocks under question, BA has a VGM (a combination of value, growth and momentum characteristics) score of ‘A’ and a Zacks Rank #3 (Hold) and LMT has a VGM score of ‘B’ and a Zacks Rank #2 (Buy). Such strong valuation should not result in steep selloffs.
Lockheed’s Cost-Saving Plans
Investors should note that, Lockheed Martin management has assumed a cost-saving program to reduce sustainment costs for F-35 by 10% over the next couple of years. This will likely result in cost savings of $1 billion over a five-year period. Also, the F-35 program provides about 146,000 U.S. jobs spread across nearly 45 states. So, investors can expect hard negotiations on the F-35 issue as there is a lot at stake.
Boeing Dividend Hike & Buyback
On December 12, Boeing raised its quarterly dividend by 30% to $1.42 a share. It also approved a fresh $14 billion share repurchase program for in the coming 24 to 30 months. Boeing bought back $7 billion worth its shares this year, marks half of the $14 billion authorization made last year. However, the new buyback announcement substituted the remaining ones and left just $14 billion available for repurchases.
Bottom Line
Given the aforementioned reasons, one can easily understand why defense ETFs are still compelling bets despite the volley of tweets coming from Trump at regular intervals. Though costs seem to be an issue, it is yet unclear how things will shape up in the coming days. Till then, investors can eye Zacks Rank #1 (Strong Buy) ETFs XAR, PPA and ITA.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>