Donald Trump’s pledges to meet North Korean premier Kim Jong-Un’s nuclear threats with “fire and fury” is probably one the root causes for the recent defense stock rally. But there are plenty of other factors that are fueling the sector. Let’s talk about those briefly (read: 3 Top Ranked Aerospace and Defense ETFs For Your Portfolio).
Mergers and Acquisitions
The aerospace and defense sector is thriving with mergers and acquisitions. Most recently, defense contractor Northrop Grumman Corp. (NOC) announced an agreement to buy Orbital ATK Inc. for more than $7.8 billion.
As per Bloomberg, the merger would widen Northrop’s portfolio of aerospace and defense electronics and boost its expertise in composites and rocket propulsion. Also, Bloomberg cited that the deal will place the entity in a better position to compete with Boeing to replace the U.S. ground-based nuclear defense system.
In early September, United Technologies agreed to a $30 billion deal to buy the avionics and interiors maker Rockwell Collins. “This acquisition adds tremendous capabilities to [their] aerospace businesses and strengthens complementary offerings of technologically advanced aerospace systems,” as per United Technologies (read: ETFs to Profit if UTX-Rockwell Deal Sees the Light of Day).
Trump's Afghanistan Strategy
In late August, President Donald Trump commented that as many as 4,000 more U.S. troops will be employed to handle Afghanistan’s terror issue and that he will launch a political arrangement with the Taliban. Trump mentioned that the war will crush al Qaeda and prevent Taliban from taking over Afghanistan.
The President also said that a quick removal of U.S. troops from Afghanistan may once again attract terrorists to fill that gap. Since more wars mean more weapons, defense stocks rose broadly following Trump’s remarks (read: Trump's Afghanistan Rhetoric Helps/Hurts These ETFs).
Strong Sector Fundamentals
The aerospace sector, though making up only 2%% of the S&P 500 Index, registered 5.2% earnings growth in 2016 and is expected to log 6.1% growth in 2017, 9.9% in 2018 and 13.1% in 2019, as per the Earnings Trends issued on Sep 14, 2017.
Coming to revenue growth, the sector is expected to log growth of 3.2% in 2016, 2.2% in 2017, 3.8% in 2018 and 5.0% in 2019. On top of it, plenty of commercial orders are another plus point for the sector. For example, The Boeing Company BA recently agreed to sell 16 of its airplanes to Malaysia Airlines. Investors should also note that the Zacks Sector Rank is in the top 19% while the Zacks Industry Rank is in the top 16%.
Passage of a $700 billion Defense Bill by Senate
The Senate passed a $700 billion national security measure on Monday by an 89-8 vote. This National Defense Authorization Act would allow $60 billion of war spending, surpassing President Donald Trump’s budget proposal. The measure would approve 94 F-35 jets manufactured by Lockheed Martin (LMT). This indicates 24 more jets that were requested by the president and seven more agreed by the House.
ETFs to Buy
Aerospace and defense ETFs like iShares US Aerospace & Defense ETF ITA, PowerShares Aerospace & Defense Portfolio PPA and SPDR S&P Aerospace & Defense ETF XAR are well positioned to capitalize on the above-mentioned factors. These funds have a Zacks ETF Rank #1 (Strong Buy).
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