The first week of the New Year has come in with a bang — literally!
According to reports, North Korea saw a successful first test of a hydrogen bomb on Wednesday (local time), which triggered a 5.1 magnitude earthquake in the northeast part of the country. Earlier in the week, tensions between Saudi Arabia and Iran escalated after the former executed an Iran-backed cleric.
The combination of these two geopolitical events has turned the focus back to defensive spending as tensions increase around the globe. But, the good news is that this is creating opportunities we can play in the market.
Last year, the iShares US Aerospace & Defense ETF (ITA) was able to outpace the overall stock market with gain of 3%. With the state of the world in just the first week of 2016 already in flux, the sector should remain an outperformer. There are two stocks in particular that I like as a play on this trend, so let’s briefly take a look at each now.
ESLT Stock to Rally on Defense Demands
Elbit Systems (ESLT) is an Israel-based company that develops defense systems for airborne, land, and naval systems, as well as commercial aviation applications and drones for customers around the world.
In the last month, ESLT has announced three major deals — worth a total of nearly $150 million — with countries from the Middle East and Asia. As more countries begin to focus on defense, ESLT should continue to see increased demand for its products.
As you can see in the chart above, ESLT stock is a rock star, from a technical perspective. It gained 45% in 2015 and is currently trading above $86, less than 5% off its all-time highs, which it touched as recently as late November.
What makes the chart so impressive is ESLT stock’s ability to bounce off of support during each pullback. In late September, the stock pulled back to the low $70’s (important support from May) and was able to rally. After breaking above the August high in November, the stock rallied before pulling back again and holding support at the old high — which is actually, then, not support. The methodical move higher over the last few years is the sign of a stock in a solid bull market.
KAMN Stock Can Benefit From the War on ISIS
Kaman Corporation (KAMN) is the other company that I really like right now. It’s relatively unknown in the world of aerospace and defense, but could be a big winner as more countries opt for air attacks instead of a boots-on-the-ground offense.
Kaman manufactures a wide range of products including the FMU-152 Joint Programmable Fuze (it tells a bomb when to explode). I expect many KAMN products to see increased demand as more air attacks against ISIS continue in the months ahead.
KAMN stock struggled throughout the summer, and as a result ended 2015 with a modest gain of 2%, although it still easily beat the broad market. But, given tensions across the globe and the likelihood that they’ll keep escalating (at least in the near term), KAMN could be setting itself up for a major breakout in the months ahead.
The long-term chart for KAMN stock shows support in the mid-$30’s, which was the level needed to keep the multi-year uptrend intact. After doing just that, KAMN stock began an impressive uptrend in October with a series of higher highs and higher lows.
The trend should take KAMN stock to its old high of $43.49 in the coming months. A close above this level would spark a major breakout, as KAMN has struggled several times to break above its resistance level. The more times a stock fails at resistance before it finally breaks out is an indication that the next move higher will be significant.
As of this writing, Matt McCall did not hold a position in any of the aforementioned securities.