For most of 2018, stocks have been held hostage to global headlines. The macro economic fundamentals are strong, but we have three people currently controlling the big whipsaws on Wall Street. President Trump is on a mission to strike a deal with China so he is butting heads with President Xi. On another front, President Trump is also in a war of words with U.S. Federal Reserve Chairman Jerome Powell to try and stop him from doing further rate hikes. Meanwhile, good stocks are suffering and that includes some defense stocks.
But therein lies an opportunity.
Stock prices are too active in this sector because investors need assurances that the status quo in defense spending will continue. The Democrats taking back the house makes this almost a guarantee. A government deadlock means that nothing will change.
The second big influence on defense stocks now is the tariff skirmish between the U.S. and China. Our leaders are not calling it a war, but it is. The 10% tariff that is already in place will soon become 25% this January. That will tarnish the global growth thesis. I bet that they will come to their sense in the last hour. Otherwise, all sides have too much to lose.
No, I don’t expect a perfect solution. But I do see them coming to some nominal terms. And just like the new NAFTA deal, it won’t be earth shattering. There will be no clear winners but everyone will be happy again.
So even now there are dozens of great defense stocks to buy that I can highlight. But these three stand out for very specific reasons.
Boeing (BA)
Boeing (NYSE:BA) is the king-of-the hill. Historically this stock is immune to dips as evident by its long-term performances. This year is an odd one though. Boeing stock is stuck in the line of fire this during trade war. So traders are under the impression that China’s retaliation to the U.S. tariffs will include penalties to BA.
In reality, China needs BA’s planes more than the company needs those sales. Boeing’s pipeline is full for decades to come. Sure, it is never ideal to antagonize the massive Chinese market, but the stock should not be sold so aggressively on every tweet.
So for this purpose, I favor owning BA stock through this period of uncertainty until the leaders come to their senses. Owning shares of Boeing at price-to-earnings ratio of 25 is not going to be a mistake in the long run. Proof of my point is that BA is still up 40% in one year despite a highly antagonistic year.
Raytheon (RTN)
Raytheon (NYSE:RTN) is another defense stock that is mired in the pool of murky headlines. This company is even cheaper than BA, as it sells at a P/E of 20. But RTN stock is not fairing as well. It is almost flat for the same period. This makes it a good choice for a comeback rally once the leaders come to terms.
The last week of October was brutal to this stock. It collapsed 12% around its earnings event. This is despite the fact that the company beat profits and raised guidance.
But the selling was overdone and evidence to it is the sharp V-shaped recovery. Technically, there should be resistance here but this is a level that the company’s performance earned and will eventually recover. From there, the bulls can remount their rebound efforts. The $180-per-share-zone is a long-term consolidation area and those usually provide support on the way down.
United Technologies (UTX)
The third defense stock that’s worth noting today is United Technologies (NYSE:UTX). Of the three, this one is the cheapest at a P/E of 18. I consider this one a blend of the two other setups. While BA stock is still soaring and RTN is lagging and below a massive ledge, UTX stock is holding in the middle of its range. This shows the investor’s willingness to catch it when it becomes a falling knife and recover it quickly.
Having good fundamentals and proven management makes this thesis even easier to justify. UTX stock may be the most exposed to a surprise upside upgrade headline. It has the most analysts on hold. As they get more comfortable with the global uncertainties, they are likely to upgrade it.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
