President Obama’s decision to shift a proposed fixed missile-defense network in Europe toward a more flexible system will have serious ramifications
for defense stocks.
Former President George W. Bush planned to put land-based missiles in Poland and a radar system in the Czech Republic. Now, President Obama wants
to put anti-missile systems at sea on destroyers and use mobile land-based radar. The result will likely be a drop for some major defense stocks.
Interestingly, many major defense companies have done surprisingly well since Obama took office. Most stocks in the sector recovered from an initial
sell-off after the election and are now trading at basically break-even since November 2008. If you own any of the following five defense stocks,
I suggest you use this recovery rally as an opportunity to sell.
Here are five key defense stocks to sell now…
Defense Stock #1 – ITT Corporation (ITT)
ITT Corporation is a large, diversified industrial company with significant exposure to the defense segment. One of the reasons war expenditures
increase exponentially during conflict relates to supply costs. It takes big bucks to field an army, especially when the battles are so far away from
home. Essentially an entire industrial complex must be duplicated in order to effectively fight the battle.
ITT Corporation (ITT) has benefited greatly from providing the goods for a well-equipped military.
ITT has performed better than its peers, as the new administration promised to keep troops in place for the short term. The chess pieces may be moved,
but the number of troops is likely to stay at a war level.
The number of troops overseas may be changing, however, as evidenced by the internal debate on Afghanistan. The do-more-with-less crowd may be the
winner here and if so, we will see fewer men and women abroad. As a result, supply needs will drop precipitously, and ITT is likely to suffer.
Defense Stock #2 – Lockheed Martin Corporation (LMT)
Targeted bombing does a fantastic job of rooting out the bad guy, but for the military complex, carpet bombing is the preferred way to go. I think
you know why.
Lockheed Martin (LMT) makes the planes and missile systems that cater to both approaches. But one makes
more money than the other. It is clear what direction Obama would prefer. He favors technology over brute strength. Unfortunately for Lockheed Martin,
brute strength generates brute profits. We will be making fewer planes for manned missions in the future in favor of more drones. The first iteration
of a defense budget under this administration cancels a plan for new marine one helicopters and halts new purchases of F-22 fighter jets.
The net effect will likely be negative for Lockheed Martin. Shares may trade for a low multiple of earnings today, but earnings will be less under
Obama from here. I can see a 10%-20% reduction in defense spending. If so, LMT could see a drop in valuation of 30%-50% from current levels. I would
Defense Stock #3 – Halliburton Company (HAL)
If there is a company more emblematic of the Bush era, Halliburton (HAL) would be it. With ties to
former Vice President and chief architect of preemptive foreign policy, Dick Cheney, HAL benefitted greatly from the wars in Iraq and Afghanistan.
Not only did HAL benefit from increasing oil prices due to instability in the Middle East, but the company made a killing on so-called no-bid contracts
for construction and military support services provided by the company. Where do you think no-bid contracts go under Obama? Can you say bye-bye? Of
course Obama cannot take away what has already been given, but how in the world will HAL replace the cushy Washington environment enjoyed over the
last decade? You cannot.
Why the stock is higher today than when Obama was elected is a mystery. But to me, the future of HAL is crystal clear. HAL will be generating fewer
dollars as these contracts expire. That means lower profits and a lower valuation.
If there was one stock to sell under Obama it would be HAL. Sell shares now before the market figures it out.
Defense Stock #4 – Alliant Techsystems (ATK)
Fewer wars mean fewer bullets. If you are looking for defense company stocks to sell, start with the ammunition manufacturers. And a leading provider
of ammunition to the military is Alliant Techsystems (ATK).
At the peak of the war mentality administration, ATK traded for approximately $120 per share. Today, with the country moving away from a war footing,
shares trade for $75. ATK makes a ton of money in supplying the military. If not for the distraction of a credit crisis and focus on Wall Street,
citizens might be a bit upset at these huge profits. Surely with making fewer bullets, profits will be negatively impacted.
The only positive for the company is that bullets do not last forever. Like the strategic oil reserve, the military likes to have an inventory of
bullets. Try a billion or more on hand just in case. I suspect the current administration may take exception to such a gaudy number. It is a luxury
instead of a need. With huge deficits such a luxury is likely to be under attack. The landscape is not positive for ATK. Even though some of the selling
has already taken place, there is more downside risk in the stock. I would sell shares.
Defense Stock # 5 – Boeing (BA)
Boeing (BA) is having enough trouble with the civilian side of its aircraft making business. A horrible
recession and fewer travelers hurt the domestic airline business. Idle planes sitting in the dessert do not help makers of aircraft. What, then, are
we to make of the decision to halt orders of C-17 transport planes to no more than the current 205 planned? Those transport planes play a huge role
in a military implementing preemptive foreign policy. Not so much for a military based on self-defense and diplomacy, as we are likely to see with
Current BA stock valuation is supported by current contracts. A drop in the government side of business will push shares of BA lower. Weakness in
domestic air travel will pressure shares as well. There is simply not much to like with BA today or in the near-term future. I would sell BA shares
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