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Trump Replaces Tillerson with Pompeo: 5 Defense Picks

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Drama continued at the White House on Tuesday after President Trump fired Secretary of State Rex Tillerson in a sudden and unexpected move. Tillerson’s dismissal comes after a series of public and private disagreements with the President on several crucial policy matters, notably North Korea. A few other dismissals followed in its wake, signaling that the atmosphere surrounding the Oval Office continues to remain volatile.

Trump also announced that he was replacing Tillerson with CIA Director Mike Pompeo. Defense stocks rose following these developments as Pompeo is perceived to be more in line with Trump’s views on crucial policy issues. Tax cuts and a favorable budget deal have already provided significant impetus to the sector, which means this is a good time to add defense stocks to your portfolios.

Trump, Tillerson Differed on Key Policy Matters

There have been long running differences between the former ExxonMobil (XOM - Free Report) CEO and Trump for some time now. Last year, Tillerson publicly distanced himself from Trump’s position on the white supremacist rally at Charlottesville by saying that “the President speaks for himself.”

More significantly, Tillerson favored a more conciliatory and diplomatic tone on several key issues such as the 2015 Iran Nuclear Deal while Trump favored a more belligerent approach. Tillerson also tried to prevent the President from exiting the Paris climate change agreement and had good relations with other Trump team members, most notably Secretary of Defense James Mattis.

Ultimately, his advocacy of a diplomatic solution with North Korea brought things to a tipping point. When Tillerson first said that he wanted to begin a dialogue with North Korea, Trump publicly disagreed with him, tweeting that he was “wasting his time.” When the President finally changed his approach last week and agreed to meet Kim Jong-Un, he did not bother to inform or consult Tillerson on the issue.

Pompeo in Sync with Trump, Muscular Approach Likely

Several defense stocks increased early on Tuesday with Lockheed Martin Corporation (LMT - Free Report) and Raytheon Company (RTN - Free Report) gaining 0.1% and 0.3%, respectively by the close. Most analysts feel that this is an outcome of Trump replacing Tillerson, who favored a more diplomatic approach, with Pompeo, who is more in line with the President’s thinking. And his opinion on several issues seems to confirm such a view.

For instance, despite the continuing investigation into Russia’s interference in the 2016 President election, Pompeo has chosen to downplay the impact the Kremlin had on its results.  Like Trump, Pompeo is a firm critic of the Iran Nuclear deal and has called the agreement “disastrous.” While serving as congressman from Kansas, Pompeo opposed Obama’s decision to close down Guantanamo Bay.

Pompeo seems to favor a hawkish approach in general and has expressed his support for the restoration of the NSA’s spying protocols. But the timing of his appointment ahead of discussions with North Korea means that Trump desires a team which maintains his hardline on North Korea. Pompeo is therefore likely to keep up the pressure against the Kim Jong Un regime.

Our Choices

Trump’s move to replace Tillerson with Matteo ahead of negotiations with North Korea shows that he intends to maintain his hard-nosed approach on key issues. A similar approach is likely to be witnessed against Iran, which can only result in the escalation of global tensions. Already buoyed by tax cuts and a favorable budget deal, such a scenario can only boost defense stocks further.

This is why it makes good sense to pick select defense stocks at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

The Boeing Company (BA - Free Report) is one of the largest defense contractors in the United States apart from being a premier jet aircraft manufacturer. Boeing’s Defense, Space & & Security (BDS) segment recorded earnings of $553 million in the fourth quarter, contributing 18.6% to the company’s bottom line.

Boeing has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 16.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days.

Huntington Ingalls Industries, Inc. (HII - Free Report) is the United States’ largest military shipbuilder. It designs, builds and maintains nuclear-powered ships such as aircraft carriers and submarines, and non-nuclear ship

Huntington Ingalls has a Zacks Rank #1. The company has expected earnings growth of 43.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 30.2% over the last 30 days.

Spirit AeroSystems Holdings, Inc. (SPR - Free Report) is one of the largest independent non-OEM aircraft parts designers and manufacturers of commercial aero structures in the world, in terms of annual revenues.

Spirit AeroSystems has expected earnings growth of 17.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.2% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

KLX Inc. is a distributor and service provider of aerospace fasteners and consumables.

KLX has a Zacks Rank #2 (Buy). The company has expected earnings growth of 21.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 9% over the last 30 days.

Curtiss-Wright Corporation (CW - Free Report) provides high-tech, critical-function products, systems and services to the commercial, industrial, defense and power markets.

Curtiss-Wright has a Zacks Rank #2. The company has expected earnings growth of 15.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.2% over the last 30 days.

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