Lots of pundits are talking these days about the need for investors to strike a defensive posture in the stock market right now. Everyone is concerned about what might happen with the tapering of bond purchases by the Federal Reserve and how that might affect the stock market.
Instead of flocking to the traditional defensive industries, investors might be better off flocking to defense stocks as a safe haven.
Investors seem to have bought the story of lowered defense spending and increased government cutbacks hurting the stocks in the industry. The truth is far different … and many of these stocks have best of the best fundamentals right now.
Huntington Ingalls (HII) does most of if its business with the government and defense agencies. The company designs, builds, overhauls, and repairs ships for the U.S. Navy and Coast Guard. They build the big nuclear-powered ships like aircraft carriers and submarines as well as amphibious assault craft and national security cutters. They also offer nuclear refueling and overhauling services.
The company is seeing spectacular earnings growth, with profits up more than 200% so far this year, and Huntington has posted four positive earnings surprises in a row. Analysts are raising their estimates for 2014 as business is much better than anyone on Wall Street expected.
The stock was upgraded to an “A” by Portfolio Grader back in November and remains a “strong buy” at the current price.
Sparton Corporation (SPA) is another company that does a lot of business with the defense industry, and it’s not feeling the pain of cutbacks. The company operates makes everything from flight controls and nuclear detection to anti-submarine sono-buoys used by the Navy. Sparton also has a Medical Device segment that develops complex and sophisticated electromechanical devices for the medical markets.
The company has posted positive earnings surprises in three of the past four quarters, and analysts have recently raised their estimates for both 2014 and 2015. The stock was upgraded to “A” back in June and Portfolio Grader still ranks the stock as a “strong buy” today.
Exelis (XLS) makes command and control systems. The Information and Technical Services segment of the company provides systems used in cyber warfare, intelligence network design, space launch programs and other engineering, and logistics solutions to U.S. government agencies.
The company has been winning some large contracts form the government lately, including deals to upgrade systems on the Harrier jets, providing the Navy with minesweeping gear and weather satellites. The company is spinning off its mission systems business to concentrate on high growth areas like critical networks, intelligence, surveillance and analytics, electronic warfare and aerostructures.
Portfolio Grader has taken notice of the continued improvement in the company’s fundamentals and upgraded the shares to a “strong buy” last month. XLS remains an “A” at the current price.