Eyeing the aerospace and defense sectors? Here are 4 factors to consider.
With every new White House, there are new policies and priorities. President Trump laid out his budget proposal last week, which outlined a strong increase to the nation's defense and military spending. While the final budget may not become reality in this exact form, the spending priorities of the new administration have become more clear, with a proposed $54 billion in new funds allocated to defense spending.
As the government readies to buy new tanks, missile systems, ships and fighter jets over the next several years, investors may want to use this time to explore aerospace and defense stocks. This sub-sector has had the wind at its back and is already chalking up solid year-to-date gains. Through March 17, aerospace and defense stocks gained 9.4%, versus a 6.2% gain in the S&P 500. Of course, there's no guarantee that this will improve or even continue over 2017 and beyond.
"We turned positive on the defense sector and upgraded most of the names we cover after Election Day," says Jim Corridore, Director, Industrials and Consumer Staples Equity Research at CFRA. "These stocks popped immediately higher after Election Day and have been trending up ever since."
The last administration did not provide such a positive backdrop for this sub-sector, and many companies made adjustments.
"Over the last five to 10 years, defense companies saw stagnant growth among revenue streams. They cut costs, streamlined operations and used cash to buy back stock. They are much leaner operations. It is a much more positive macro environment now and we should be able to see meaningful earnings growth ahead," Corridore says.
The defense sector includes companies like Lockheed Martin (LMT), Northrup Grumman (NOC), Raytheon (RTN) and General Dynamics (GD). The overall macro environment is a major factor for the fortunes of these companies. "If peace breaks out, it's not great for the industry. Right now we are not seeing that. There is a lot of bluster from the administration on a number of geopolitical issues." Corridore says.
If you are considering investing in the aerospace and defense space, take some time to do your homework first.
Don't Go All In. "This sector has had a bit of a run-up based on campaign promises. Investors can wait and observe or get in slowly. There has been a lot of anticipation around this. Don't go all in. Start slowly," says JJ Kinahan, Chief Market Strategist at TD Ameritrade.
Consider Buying On Dips. Last week's budget proposal was a first pass and there are likely to be negotiations and horse trading between the parties, which could trigger volatility for these names. "On days when things look negative for this budget, investors may have the opportunity to pick up stocks at a less expensive level, Kinahan says."
Explore Related Companies. Aerospace companies like Boeing (BA) aren't the only way to play that space. "What types of technology are on these planes and ships? The suppliers may benefit in this environment as well," Kinahan says.
Think of this Sector's Income Aspect. Stocks in this sector typically offer a dividend in the 2% to 3.5% range, Corridore says. "The income component should be considered."
While this first budget proposal is merely a start, it outlines the spending priorities of the new administration. The winds are changing and the aerospace and defense sector might be poised to benefit.
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