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Chaos Looms Over Pentagon: Defense Stocks Still Lucrative?

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Shares of major U.S. defense firms plummeted after U.S. Defense Secretary James Mattis announced that he will resign from the White House by the end of February 2019. Confusion increased after President Donald Trump tweeted about the secretary’s departure by Jan 1, two months earlier than originally planned.

The sudden exit of Mattis, a strong advocate of bigger defense budget and a close aide of President Trump in matters of defense, and the consequent events have resulted in the Zacks Aerospace sector (containing the U.S defense majors) declining 5.8% since Dec 20.

Story Behind Mattis’ Resignation

Mattis resigned due to disagreement over Trump's recent decisions on a couple of foreign policies. Notably, last week, Trump made two major decisions that overruled the advice of his defense secretary — withdrawing all U.S. troops from Syria and ordering a reduction in U.S. troops in Afghanistan by approximately half.

Impact on Defense Stocks

Trump’s latest Syria decision is likely to empower military forces of Russia and Iran, thereby leaving Syrian Kurds at risk from both ISIS and Turkey. If this leads ISIS to salvage its lost strength once more, as many do fear, it would be a big blow to the global security establishments and may even result in loss of faith in U.S. defense forces.

At the same time, many remain skeptical about how deputy defense secretary Patrick Shanahan, elected by Trump to take Mattis’ place, will perform with no military and foreign policy experience. A former corporate executive, Shanahan's portfolio at the Department of Defense reflects no experience in international affairs or counterterrorism.

Naturally with Mattis out of Pentagon and apprehension surrounding his replacement, investors have become increasingly worried about the fate of defense majors in the coming days. This was reflected in the notable sell-offs we witnessed in the U.S. defense space over the last couple of trading days.

Stocks in Focus

Below we have mentioned three defense majors, shares of which individually plummeted more than the broader sector’s decline. These stocks also have solid international exposure. However, one should keep in mind that this is just a transitory effect of the aforementioned events on the defense space, which has been excelling under Trump’s administration so far and is expected to do so going ahead on inherent strength.

These stocks carry a Zacks Rank #2 (Buy) and have witnessed solid estimate revisions, thus becoming worthy of a place in investors' portfolio. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Boeing Company (BA - Free Report) is a premier jet aircraft manufacturer and one of the largest defense contractors in the United States. The company’s shares have lost 6.1% since Dec 20. However, its Zacks Consensus Estimate for 2018 earnings indicates annual growth of 25% and the company has seen two upward revisions in the past 60 days. It also has a solid estimated long-term earnings growth rate of 13.3%.

Lockheed Martin Corp. (LMT - Free Report) is the largest defense contractor in the world. The company’s shares have lost 7.6% since Dec 20. However, its Zacks Consensus Estimate for 2018 earnings indicates annual growth of 31.4%. The company has seen one upward revision in the past 60 days. It has a solid estimated long-term earnings growth rate of 6%.

Raytheon Company (RTN - Free Report) is one of the premier missile makers in the United States. The company’s shares have lost 7.2% since Dec 20. However, its Zacks Consensus Estimate for 2018 earnings indicates annual growth of 32.6%. The company has witnessed two upward revisions in the past 60 days. It has a solid estimated long-term earnings growth rate of 13.9%.

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