The global asset markets have been rewarding in the last few years. At the same time, the markets have faced multiple headwinds. This includes the pandemic, supply chain concerns, inflation and interest rate uncertainty. And now a significant rise in geo-political tensions. These headwinds have been reasons for portfolio reshuffling. Active portfolio management has been more fruitful as compared to a passive portfolio.
With this rise in geo-political tensions, the markets are faced with another headwind. Again, there are certain stocks or sectors that are likely to out-perform as compared to others.
With the Russian invasion of Ukraine, some of the key concerns that arise include commodity price inflation and renewed global growth deceleration. Also, sectors like defense, energy and other hard assets might be primary beneficiaries. It also makes sense to hold some low-beta stocks in the portfolio, which will help in capital preservation.
I would also add here that the Russia-Ukraine war is not the only friction zone globally. There are several geographies where tensions have remained elevated in the last few years.
Let’s therefore discuss seven stocks that stand to benefit from rising geo-political tensions.
- Lockheed Martin (NYSE:LMT)
- Newmont Corporation (NYSE:NEM)
- Tesla (NASDAQ:TSLA)
- Equinor (NYSE:EQNR)
- Northrop Grumman (NYSE:NOC)
- Nordic American Tankers (NYSE:NAT)
- Pfizer (NYSE:PFE)
Geo-Political Tensions & Stocks: Lockheed Martin (LMT)
Over a one-month period, LMT stock has trended higher by 14%. A major part of the rally has come after the recent escalation in geo-political tensions. With LMT stock still trading at a forward price-to-earnings-ratio of 15.4, there seems to be visibility for further upside.
In terms of business growth, Lockheed reported an order backlog of $135 billion as of December 2021. It’s very likely that the order backlog will accelerate in the coming quarters.
The existing backlog already provides clear cash flow visibility. In the next two years, Lockheed expects to deliver consolidated free cash flow (FCF) of $12.1 billion.
It’s also worth noting that Lockheed reported 28% of revenue from overseas markets in 2021. With NATO allies likely to ramp-up defense spending, overseas revenue is likely to swell. As an example, Germany has already pledged to nearly double its defense spending. The country is also considering buying American fighter aircraft for the first time in decades. Notably, Lockheed’s F-35 is on the table as one such option for the German Airforce.
LMT stock also has an annualized dividend pay-out of $11.2. This implies a robust dividend yield of 2.5%. As cash flows swell in the coming years, dividend pay-out and share repurchase will create value.
Newmont Corporation (NEM)
With rise in geo-political tensions, gold has been surging higher. It seems likely that gold will trade above $2,000 an ounce as investors seek refuge in safe assets.
Additionally, the rise in energy prices implies further inflationary pressure. Gold has been an effective hedge against inflation. A good proxy for exposure to gold is through gold mining stocks.
Newmont seems to be among the top stocks to buy from the sector. For 2021, the company reported revenue of $12.2 billion and free cash flow of $2.6 billion. With the recent surge in gold price, the company is well positioned for FCF in excess of $3.0 billion.
Another point to note is that Newmont has a net-debt-to-adjusted-earnings before interest, taxes, depreciation, and amortization (EBITDA) of 0.2. With a robust balance sheet, the company is positioned for aggressive growth.
I also like Newmont because of the company’s assets. As of December 2021, the company had 96 million oz. of gold reserves and 112 million oz. of resources. With the current project pipeline, the company expects to sustain production through 2040s. Therefore, the company has clear long-term cash flow visibility.
NEM stock also offers a current dividend of $2.2 per share. With gold price upside, a revision in annual dividends is due. The stock is therefore worth considering for income investors.
Geo-Political Tensions & Stocks: Tesla (TSLA)
After making highs of $1,243 in November 2021, TSLA stock has been in a correction mode. I believe that this is a good opportunity to accumulate the stock.
With rise in geo-political tensions, energy prices have surged. It’s worth noting that Europe still depends on Russia for natural gas. One way to reduce dependence over time is to shift to renewable energy sources. Tesla stands to benefit from potentially accelerated adoption of electric vehicles.
In a recent development, the company’s long-delayed German giga-factory received conditional approval. Tesla already has a 13% market share in the electric vehicle (EV) segment in Europe. Once production scales-up, it’s likely that the company will gain market share.
Tesla also has an attractive pipeline of new vehicles. This includes Cybertruck and Tesla Roadster. Additionally, Tesla Semi is also in the development stage. These launches in the next few years will ensure that deliveries growth remains robust.
From a stock price perspective, another factor to like is the growth in cash flows. In 2022, Tesla reported operating cash flow of $5.9 billion. Last year, the OCF swelled to $11.5 billion. This provides the company financial flexibility for investment in innovation. At the same time, cash flows are the valuation determinant and the business is a cash flow machine.
Equinor (EQNR)
As I write Brent Crude is already trading at $118 per barrel. It’s unlikely that oil price will correct meaningfully even after Russia-Ukraine tensions deescalate. Sanctions against Russia will ensure that the energy demand-supply scenario remains tight.
It therefore makes sense to hold oil and gas exploration stocks in the portfolio. EQNR stock looks attractive even after an upside of 49% in the last six-months. With quality assets in the Norwegian region, the company is positioned to benefit.
One reason to like Equinor is the low-break even assets. The company has guided for $45 billion in free cash flows between 2021 and 2026. This guidance assumes that oil is trading at $60 per barrel. Given the fact that Brent is trading near $120 per barrel, Equinor is positioned for robust FCF.
Equinor has also planned to invest $23 billion in renewable energy assets between 2021 and 2026. If free cash flows are more than the initial expectation, investments will also accelerate. This will help Equinor build a diversified energy portfolio in the next five to ten-years.
Equinor also has a current dividend yield of 1.8%. Considering the cash flow visibility, dividends are likely to increase on an annual basis.
Geo-Political Tensions & Stocks: Northrop Grumman (NOC)
Northrop is another aerospace and defense company that stands to benefit from rising geo-political tensions. With the Russia-Ukraine conflict, NOC stock has surged by 20% in the last one-month.
However, the stock still trades at a forward P/E of 16.4. The stock also offers investors an attractive dividend yield of 1.4%.
For 2021, Northrop reported organic revenue growth of 3% to $35.7 billion. For the current year, revenue is guided (mid-range) at $36.4 billion. An important point to note is that the company has guided for free cash flow of $2.8 billion and $3.25 billion for the current and next year respectively. As financial flexibility remains robust, dividends are likely to sustain.
In terms of order intake, Northrop reported a total backlog of $76 billion at the end of 2021. For the last year, the company received new orders worth $32.1 billion. Given the current geo-political scenario, order intake is likely to increase in 2022. In particular, international business is likely to gain growth traction. The result might be higher than expected FCF for 2023 and beyond.
Nordic American Tankers (NAT)
Among the small-capitalization (small-cap) stocks, NAT stock looks attractive and positioned to benefit from the escalation in geo-political tensions. In the last month, NAT stock has surged by 45%. I expect the rally from oversold levels to sustain as the stock discounts better quarters ahead.
As an overview, Nordic American is an owner and operator of Suezmax crude oil tankers. The Russian invasion of Ukraine has disrupted energy trade through the Black Sea. This has resulted in tanker day-rates surging to the highest level since 2008.
It’s worth noting that Nordic American reported adjusted EBITDA loss in the third quarter of 2021. However, with improvement in operating conditions, the company reported positive adjusted EBITDA of $1.9 million in the fourth quarter of 2021.
It seems very likely that adjusted EBITDA will improve meaningfully through 2022. With tensions likely to sustain, the tanker rates will remain firm. NAT stock also has a dividend yield of 1.73%. I would not be surprised if dividends increase in the next few quarters. An increase in cash flows and financial flexibility will also allow Nordic American to de-leverage its balance sheet.
Geo-Political Tensions & Stocks: Pfizer (PFE)
Pfizer does not directly benefit from the conflict. However, due to the escalation in tensions, the markets are jittery. The economic outlook also remains uncertain considering the impact of the war. In such a scenario, there is some flow of funds from high-beta to low-beta stock.
PFE stock is a low volatility stock that offers investors a dividend yield of 3.33%. The Covid-19 vaccine has given Pfizer a strong revenue and cash flow bump-up. Pfizer will utilize the enhanced financial flexibility to pursue organic and inorganic growth.
As a matter of fact, Pfizer has pursued two acquisitions in the last few months. These acquisitions have helped the company broaden its product pipeline for various conditions.
It’s worth noting that Pfizer already has ten products in registration phase and 27 in phase three. Additionally, there are 25 and 27 drug candidates in phase two and phase one of trials. With a deep pipeline, the company has long-term growth visibility.
For 2021, Pfizer reported revenue of $81.3 billion. In the current year, the company has guided for revenue of $100 billion. Therefore, healthy top-line growth is likely to sustain. Booster doses for the Covid-19 vaccine coupled with vaccination for the younger age group is likely to keep growth strong beyond 2022.
Overall, PFE stock is an attractive name to consider among defensive stocks. With big investments in research and development, the company has a positive long-term outlook.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
