3 Defense Stocks That Could Be Left in the Cold

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defense stocks - 3 Defense Stocks That Could Be Left in the Cold

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In what should be a boon for defense stocks, the White House recently approved sales of currently serving fighter jets to three Persian Gulf states. Only a Congressional approval stands in the way as the Pentagon and the State Department have already confirmed their support. That’s a huge revenue boost for the aeronautic industry. However, defense stocks have been slow to respond. Should investors be concerned about the new Cold War’s lack of profitability?

Defense_Stocks_Jets_Airforce_185.jpgIsolated events should be taken with a healthy grain of salt. However, the exchange-traded fund iShares Dow Jones US Aerospace & Defense (NYSEARCA:ITA) is up only 3% for the second-half of the year. That’s almost exactly in line with the broad benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY). The immediate performance of defense stocks also sharply contrasts with its run earlier in the year. Specifically, ITA hardly moved off the pending Persian Gulf sale.

A major concern is that the U.S. has a history of shifting allegiances. In the early 1980s, the western world condemned the Soviet Union’s belligerence in Afghanistan. The American sentiment was summed up in the ending credits of Rambo III, which stated, “This film is dedicated to the brave Mujahideen fighters of Afghanistan.” Mujahideen is Arabic for “those engaged in jihad.” That just wouldn’t fly in contemporary society. But more ominously, today’s allies could become tomorrow’s enemies.

Then there’s the problem of cost. Advanced weaponry tickles our patriotism, but causes palpitations for accountants of major defense stocks. We are reminded that the Soviet Union collapsed in no small part to economic instability. Communist China and the resurgent Russia are not going to accept American military hegemony lightly. Therefore, any advancements we make will inevitably result in an expensive game of one-upmanship.

It’s not that defense stocks are bad investments. However, financial concerns are eliciting cold feet in the wake of the new Cold War.

Defense Stocks to Sell: Lockheed Martin Corporation (LMT)

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Source: Source: JYE Financial, unless otherwise indicated

Lockheed Martin Corporation (NYSE:LMT) is very close to completing a critical deal, but it’s not out of the woods yet.

Despite the Obama administration’s approval for Lockheed to sell its F-16 fighter jets to Bahrain, there were ideological concerns clouding negotiations. Primarily, Bahrain’s human rights records caused stipulations to be built into the proposal.

Apparently, those reservations have been resolved, yet LMT stock isn’t jumping on the news.

In business, as in dancing, it takes two to tango. With the Middle East being such a geopolitical flashpoint, there’s no guarantee that Bahrain will continue to play ball. Even if Congress approves the F-16 sale, Bahrain could theoretically cut away from the deal. That’s a bad scenario for Lockheed Martin stock, which has been challenged by substandard revenue growth. Worryingly, its sales rate is below that of a majority of aerospace defense stocks.

The kicker is that LMT stock may need Bahrain more than the other way around. According to defense industry insiders, the F-16 has struggled to find a home. Any major sale abroad is critical to the survival of the venerable fighter jet. But it also means that Lockheed Martin stock is dependent on foreign money. That precarious relationship works so long as governmental stability exists. In regions where Bahrain exists, it’s frankly a scary proposition.

The F-16 deal is a great and necessary one for Lockheed. But don’t expect too many fireworks to make its way towards LMT stock.

Defense Stocks to Sell: Boeing Co (BA)

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Source: Source: JYE Financial, unless otherwise indicated

At the surface level, it may look like Christmas for aeronautical defense stocks. In a stroke of good fortune, Boeing Co (NYSE:BA) — like rival Lockheed — was boosted by the White House approval for its fighter jet sales proposal.

According to the terms, Boeing will sell up to 40 F/A-18s to Kuwait, and 72 F-15s to Qatar. The latter is especially significant because the F-15 is one of the older fighter jets in the American arsenal.

Obviously, any time the life of a product is extended, it’s great news for the supplier. BA stock has been horizontal for most of this year, so the boost couldn’t have come at a better time. For Boeing employees at the company’s St. Louis plant, the Gulf deals equates to continued paychecks versus financial uncertainty. Happy workers lead to positive public perception, which in turn is a win for BA stock.

What could go wrong?

Admittedly, Boeing stock is positioned better than pure defense stocks due to its robust civilian business. However, geopolitical dependency is a troublesome issue, especially in the Middle East. The famous F-14 Tomcat was once sold to the Iranian military. Today, our relations with Iran are strained, to say the least. Instead of this fighter jet deal being a boon, it became a national and financial liability. BA stock and others run this very real risk.

Boeing is an industry titan and I don’t expect it to lose that status anytime soon. However, BA stock isn’t going to make you rich at this juncture.

Defense Stocks to Sell: Northrop Grumman Corporation (NOC)

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Source: Source: JYE Financial, unless otherwise indicated

If fears of international dealings gone awry are pressuring defense stocks, Northrop Grumman Corporation (NYSE:NOC) seems like the ideal alternative, as many of its technologies are strictly limited to the U.S. military.

Within its aerospace division, Northrop’s claim to fame is the B-2 Spirit, better known as the “Stealth Bomber.” Because it’s the only aircraft in the American arsenal that can stealthily deliver large payloads over long distances, there’s zero chance that the B-2 will end up in foreign hands.

That’s a plus for NOC stock — or is it?

Northrop has a history of experimental aircraft. Throughout much of World War II, and in the years beyond, the company produced a string of “flying wing” designs. Today’s B-2 bomber owes much of its success to those early pioneering days. Additionally, Northrop is hard at work designing the B-21, which will replace the long-in-the-tooth B-52 and B-1B bombers. Again, NOC stock buyers can take pride — this is an exclusive American property.

Essentially, Northrop Grumman stock is the defense equivalent of Tesla Motors Inc (NASDAQ:TSLA). But where the comparison falls short is that Tesla can aggressively monetize its technologies. Northrop, for reasons of national security and Cold War politics, cannot. That puts NOC stock in a strange situation. On one hand, it can win out on all the high-profile government contracts. Its profitability margins attest to that. However, sales opportunities are necessarily limited. Northrop’s middling revenue growth is clear confirmation.

Within the industry, NOC stock is one of the safest bets. But that safety just isn’t exciting enough for many investors.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/3-defense-stocks-left-cold/.

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