President Trump has finally signed the $717-billion 2019 defense spending bill into law — the largest allotted to U.S. defense, which has placed defense stocks in the spotlight again. The Pentagon’s base budget holds $616.9 billion, overseas contingency operations have been authorized for $69 billion and nuclear weapons programs hold $21.9 billion under the Energy Department. Also, compensation for troops has been raised by 2.6%, marking the biggest increase in almost a decade.
The NDAA permits $7.6 billion for 77 of Lockheed Martin’s (NYSE:LMT) F-35 Joint Strike Fighters. The fifth-generation stealth jet is the Pentagon’s most expensive weapon system, per an article published on CNBC. The law also allows $85 million for UH-60M Black Hawk utility helicopters, which are made by Sikorsky, a unit of Lockheed Martin, per CNBC.
There was an approval of $1.56 billion for three littoral combat ships despite the Navy’s request for only one. This marked the President’s interest in spending generously on defense, and thus spiked investors interest in defense stocks. Overall, 13 new warships were permitted for the approaching fiscal year. The budget also enhanced the “size of the Navy and the ranks of the military by 15,600 active-duty troops.”
National Defense Authorization Act also postpones the delivery of stealth fighter aircraft to Turkey (due to the country’s interest in buying a Russian missile defense system) and dulls Chinese investments by consolidating the Committee on Foreign Investment in the United States (read: Profit From Turkish Turmoil With These Global Inverse ETFs).
Aerospace and defense stocks comprise a top-ranked Zacks sector (top 6%). In the second quarter, the space saw 24.8% earnings growth with a beat ratio of 81.8%, while revenues increased 7.7% with an 81.8% beat ratio, per Earnings Trends issued on Aug. 9. For the third quarter, the sector is poised to log a decent 19.5% earnings growth on 8.1% higher revenues (read: Aerospace and Defense ETFs Rise on Strong Q2 Earnings).
Against this backdrop, a few defense stocks and ETFs look appealing.
Defense Stocks to Consider
Aerojet Rocketdyne (NYSE:AJRD) focuses on developing military, civil and commercial systems and components for the aerospace and defense market.
The aforementioned LMT is a global security and aerospace company, which is engaged in the manufacture, integration and sustainment of advanced technology systems, products and services.
Teledyne Technologies Incorporated (NYSE:TDY) provides enabling technologies for industrial growth markets.
Defense ETFs to Consider
iShares U.S. Aerospace & Defense ETF (BATS:ITA) provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense by tracking the Dow Jones U.S. Select Aerospace & Defense Index. Boeing (NYSE:BA), United Technologies (NYSE:UTX) and Lockheed Martin are the top three holdings of the fund. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR) seeks to track a modified equal-weighted index, which provides the potential for unconcentrated industry exposure across large, mid and small-cap stocks. Arconic (NYSE:ARNC), Mercury Systems (NASDAQ:MRCY) and Aerojet Rocketdyne Holdings (NYSE:AJRD) take top three spots of the fund. The fund currently has a Zacks ETF Rank of 2 with a Medium risk outlook.
Invesco Aerospace & Defense ETF (NYSEARCA:PPA) is based on the SPADE™ Defense Index. United Technologies, Honeywell International (NYSE:HON) and Lockheed Martin get the top three spots in the fund. The fund currently has a Zacks ETF Rank #2 with a Medium risk outlook.
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