Size matters…
If you were looking for a two-word slogan to best describe our president’s personal philosophy, that would be the most fitting one…
In everything from the size of his buildings to the size of his nuclear arsenal, President Donald Trump is obsessed with being the biggest and the best, recently tweeting:
North Korean Leader Kim Jong Un just stated that the ‘Nuclear Button is on his desk at all times.’ Will someone from his depleted and food starved regime please inform him that I too have a Nuclear Button, but it is a much bigger & more powerful one than his, and my Button works!
This was the most recent in a serious of notorious Trump tweets regarding the North Korean leader. And it seems like every time the president tweets, the markets — especially defense stocks — react in kind.
But the administration continues backing up the president and his social media taunts, stating that the commander in chief is just looking out for the security of Americans.
Sarah Huckabee Sanders made this statement at a recent White House news briefing:
I think what’s dangerous is to ignore continued threats. If the previous administration had done anything and dealt with North Korea and dealt with Iran instead of standing by and doing nothing, we wouldn’t have to clean up their mess now.
And she’s right. It’s dangerous to continue ignoring threats.
What’s more, the president isn’t just making empty promises either. With increased spending and heightened tensions, the defense sector made a huge rally in 2017 that’s likely to carry over into 2018. And this gives Trump, and the American people, a big nuclear button that works.
Pure plays are a good option when considering whether or not to invest in all of this Trump-induced uncertainty. When it comes to defense and national security, wanting to invest in a company that focuses on that and only that isn’t really a bad thing…
Lockheed Martin Corporation (NYSE: LMT)
Lockheed Martin is the largest defense contractor in the entire world.
It dwarfs the competition in both revenue and as a defense pure play.
Not unlike car dealerships, though sales make the headlines, the big money is in the repair shops.
You see a headline whenever Lockheed announces a deal worth $37 billion for 440 F-35s to 11 nations, which happened back in June.
But the fact is that once those nations get these planes, they’ll need to be trained in flying them, maintaining them, and upgrading them for years, even decades, to come.
And it’s the same with all major equipment. If you’re spending $84 million on a plane or billions on a ship, keeping it in top shape is critical. And who better to maintain them than the company that built them?
Lockheed is number one because it sticks to what it does well: defense. And given the state of the world right now, defense is also — for good or bad — a growth industry. Any growth in this sector means massive growth for LMT stock.
Its stock has outperformed all of the major U.S. averages year-to-date. So, as you read the headlines of how well the Dow or the S&P 500 is doing, just know that Lockheed is doing better.
And in an increasingly dangerous world, the best offense is a good defense stock…
Huntington Ingalls Industries, Inc. (NYSE: HII)
Even though Huntington Ingalls Industries might not immediately be on your radar, it should be because it has outstanding upside potential.
This company engages in designing, building, overhauling, and repairing ships primarily for the U.S. Navy and Coast Guard.
Huntington Ingalls provides nuclear-powered ships, such as aircraft carriers and submarines, and also nonnuclear ships.
Similar to Lockheed, Huntington Ingalls sticks to what it does best, as well. In response to the company’s pure-play nature, the stock has a long-term earnings growth rate of 15% and has delivered an average position earnings surprise of 14.8% in the last four quarters.
The stock has rallied 26.3% in 2017, the S&P 500 gaining a mere 19.8% in comparison…
iShares US Aerospace & Defense ETF (NYSE: ITA)
An ETF, like iShare US Aerospace & Defense, might be more your speed. And if so, that’s no problem — they’re doing really well right now, too.
Even though the main reasons for why defense ETFs are doing well right now are pretty evident if you take a glance at recent world events, they aren’t the only causes of this surge.
As the premier defense and aerospace ETF, ITA has daily fund flows in excess of $3 million and is in position to take advantage of favorable developments in the defense sector. This includes strong sector fundamentals, merger activity, and increased defense spending.
Of the several major ETFs covering the defense and aerospace sector, ITA probably has the most straightforward investment strategy because it diversifies by capping the weightings of biggest securities.
In terms of performance, it has amassed an enviable year-to-date return of close to 30%. This makes it — at $4.3 billion under management — not only the biggest defense ETF in terms of assets but also among the strongest performers of 2017.
ITA invests the majority of its assets in pure-play defense and aerospace companies. Plus, 57% of the fund’s assets are invested in the top 10 holdings, and many big-name defense and aerospace contractors are on that list.
Investors who are anticipating that global turmoil and Trump’s agenda will continue boosting defense stocks in the near future could find the iShares U.S. Aerospace and Defense ETF a worthwhile choice…
The Bottom Line
There’s no denying that Trump’s presidency has been a boon for the U.S. defense space, which was grappling with the budget sequestration act implemented by the Obama administration.
Trump’s budget request took stocks to new heights in the second half of 2017. Courtesy of these developments, major defense contractors should be expecting a slew of contracts in the new year.
No doubt, defense will maintain its rally in 2018.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today