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Defense Stocks Hit All-Time Highs on Arms Deal: 5 Best Buys

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President Donald Trump sealed a multi-billion arms deal with Saudi Arabia, a move that strengthened a decade long alliance with the world’s largest oil exporter as the kingdom’s economy opens. Arms sales to Saudi Arabia catapulted stocks in defense companies to record highs.

And history shows that such key deals boost the value of defense firms. Banking on such bullish trends, investing in some solid defense stocks seems judicious.

US-Saudi Arabia Seal Weapon Deal

Trump signed an almost $110 billion arms deal with Saudi Arabia, which could be worth $350 billion over the next 10 years. The White House said that this was “a significant expansion of security relationship” between the countries.

Saudi Arabia imported $3 billion worth of U.S. arms last year, the maximum by any country. Saudi Arabia is also the primary destination for U.S. arms sales, with the kingdom acquiring nearly 10% of U.S. exports in the 2011 to 2015 period.

The oil-rich kingdom is on a broad-based push for economic development and is looking forward to signing a series of deals with private U.S. corporations worth tens of billions of dollars. The arms package will boost Saudi Arabia’s military prowess as tensions flare in the region. Saudi Arabia is being targeted by radical Islamic extremism, hence, such a deal will help the country counter terrorist attacks.

The U.S. also views the nation as a potential partner in its endeavor to check the global ambitions of Iran. Further, the Saudi Arabia deal could lead to additional sales for both Israel and the Persian Gulf countries, all of whom are apprehensive about Iran’s aggressive foreign policy and its support toward terrorist groups in the region.

Benefactors of the Deal

Lockheed Martin Corporation LMT is poised to be the biggest gainer from the deal. The world’s largest defense contractors, whose technology was part of the agreement, said that the deal “will directly contribute to Saudi Arabia’s Vision 2030 by opening the door for thousands of highly skilled jobs in new economic sectors”. According to Lockheed Martin, Saudi Arabia has “expressed its intent” to buy $28 billion worth of weapons systems from the company. This includes 150 Sikorsky helicopters, the THAAD missile defense system and four littoral combat ships.

Jet maker Boeing Co BA also signed a handful of deals with Saudi Arabia during Trump’s weekend visit. This involved the sale of military and passenger aircraft. Raytheon Company RTN, which has done business in the Middle East for more than five decades, plans to form Raytheon Arabia that will create home-grown defense, aerospace and security capabilities in Saudi Arabia in areas like cybersecurity and missile defense.

In fact, these types of arms deals have led to the rally in defense stocks in the past, according to CNBC analysis using Kensho. Going back to 2009, one month after the then U.S.-Saudi Arabia arms deal, the iShares U.S. Aerospace & Defense ETF ITA was up 3.3%, reflecting almost double the return of the S&P 500.

Defense Stocks Soar to All-Time Highs

This time also it seems Trump’s trip to Saudi Arabia is paying off for defense stocks. Shares of Lockheed Martin, General Dynamics GD and other big defense players rallied on May 22 on the arms deal.

While Lockheed Martin was the big winner with 1.6% after jumping to a new 52-week high of $280.79 per share, General Dynamics went up 0.9% to $197.55, after hitting a 52-week high of $199 a share. Raytheon, in the meantime, rallied 0.4% after peaking to $163.57 a share, also a 52-week high. Boeing was up 1.2% to just under $183 a share, but, unlike others it did not scale a 52-week high. Nevertheless, the PowerShares Aerospace & Defense Portfolio PPA was up 0.9%, while the ITA gained 0.8%

5 Best Defense Picks for Your Portfolio

With defense stocks hitting highs on U.S.-Saudi Arabia arms deal, investing in such companies will be prudent. And it also makes more sense to invest in such stocks when Trump asks for an increase in military spending to the tune of $54 billion (read more: 5 Stocks to Buy as Trump Promises to Spend Big on Defense).

We have, thus, selected five sound defense stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Northrop Grumman Corporation NOC provides systems, products, and solutions to government and commercial customers in the areas of aerospace, mission systems, and technology services worldwide. Northrop Grumman has a Zacks Rank #2.

Northrop has started off on a strong note this year. Both its earnings and revenue figures for the first quarter exceeded the Zacks Consensus Estimate.  Also, results were impressive on a year-over-year basis, thanks to strong sales growth at the Aerospace segment (read more: Northrop Grumman Tops Q1 Earnings, Hikes EPS View).

The Zacks Consensus Estimate for its current year earnings increased 4.1% over the last 60 days. The company is expected to return 11.4% this year, more than the Aerospace - Defense industry’s projected return of 5.2%.

Rockwell Collins, Inc. COL designs, produces and supports communications and aviation systems for commercial and military customers. The company sports a Zacks Rank #1.

Rockwell Collins’ second-quarter fiscal 2017 results beat the Zacks Consensus Estimates on both the top- and bottom-line fronts (read more: Rockwell Collins Tops Q2 Earnings, Revises FY17 View).

The Zacks Consensus Estimate for its current year earnings soared 10.7% over the last 60 days. The company is likely to return 5.3% this year, more than the Aerospace - Defense Equipment industry’s projected return of 1.1%.

Curtiss-Wright Corp. CW provides engineered products and services to the aerospace, defense, power generation and general industrial markets. The company has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for its current year earnings advanced 2.5% over the last 60 days. The company is expected to return 6.4% this year, better than the Aerospace - Defense Equipment industry’s estimated return of 1.1%.

TransDigm Group Incorporated (TDG - Free Report) is a designer, producer and supplier of engineered aircraft components for use on commercial and military aircraft in service.

TransDigm – with a Zacks Rank #2 – reported striking second-quarter fiscal 2017 results, as earnings beat estimates and registered an increase of nearly 6% year over year (read more: TransDigm Beats on Q2 Earnings, FY17 View Positive).

The Zacks Consensus Estimate for its current year earnings increased 0.4% over the last 60 days. The company is likely to return 6.7% this year, higher than the Aerospace - Defense Equipment industry’s projected return of 1.1%.

Esterline Technologies Corporation ESL designs, manufactures, and markets engineered products and systems primarily for aerospace and defense customers in the U.S. and internationally. The company has a Zacks Rank #2.

The Zacks Consensus Estimate for its current year earnings improved 1% over the last 60 days. The company, which is part of the Aerospace - Defense Equipment industry, is expected to yield positive returns for this year.

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