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Barron's: Defense Stocks Usually Flourish in Election Years

Barron's: Defense Stocks Usually Flourish in Election Years
(Dimjul/Dreamstime)

By    |   Wednesday, 15 January 2020 09:00 AM

Barron’s recently said investors should stick with defense-contractor stocks, which remain reasonably priced with healthy growth prospects, because such shares provide a useful hedge against geopolitical uncertainty.

UBS analyst Myles Walton also said the outlook for defense spending remains strong and that defense stocks have beaten the market in the year leading up to nine out of the past 10 presidential elections, by an average of 16 percentage points, Barron's explained.

Barron’s touted the outlook for Lockheed Martin (LMT), Northrop Grumman (NOC), and Raytheon (RTN) ahead of U.S. midterm elections. Barron’s pointed to the likelihood of elevated spending no matter the midterm outcome, based in part on disruptive new warfare technologies like hypersonic missiles.

UBS analyst Myles Walton looked at attacks involving the U.S. military in recent decades, like Operation Infinite Reach, a 1998 Navy strike on al-Qaeda bases in Afghanistan and a pharmaceutical plant in Sudan, and the 2000 bombing of the USS Cole in a Yemeni harbor. He found that defense stocks tended to rise 4% to 6% within three months.

This year through Jan. 6, a basket of six defense stocks—the three aforementioned ones, plus L3Harris Technologies (LHX), Huntington Ingalls Industries (HII), and General Dynamics (GD)—gained an average of 6%.

The spending outlook suggests that investors should stick with U.S. defense contractors as long as valuations remain reasonable. Lockheed recently traded at 17.2 times projected 2020 earnings; Northrop, 16 times; and Raytheon, 17.5 times. The companies are seen growing earnings at rates ranging from 9% to 15% a year through 2021—probably well ahead of earnings for the broader stock market.

Meanwhile, rather than flee the market or throw money into havens, ETF investors plowed capital into exchange-traded funds that stand to benefit from any escalation of tensions, Bloomberg said.

The Industrial Select Sector SPDR Fund, or XLI, which owns manufacturers including defense contractors, last week absorbed about $1.8 billion over five days. It was the best streak of inflows since January 2018, data compiled by Bloomberg show.

“History has shown us that geopolitical risk rarely disrupts U.S. markets for long,” said James Pillow, managing director at Moors & Cabot Inc. “In fact, one could statistically argue most have been buying opportunities.”

Traders also added cash to high-yield debt, pouring $138 million into the Xtrackers USD High Yield Corporate Bond ETF -- the most since June 2018.

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UBS analyst Myles Walton also said the outlook for defense spending remains strong and that defense stocks have beaten the market in the year leading up to nine out of the past 10 presidential elections, by an average of 16 percentage points.
barrons, defense, stocks, election
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2020-00-15
Wednesday, 15 January 2020 09:00 AM
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