President Trump’s new budget calls for increased defense spending, a boost for Defense Stocks, providing opportunities for savvy investors. The broad market just sold off on interest rate fears providing discounted entry for new positions. Find out how to profit from the news in this article.
The budget news has the entire defense sector in the spotlight and moving higher.The Defense Stocks Trump’s budget will aid most are listed below, exclusively for our readers.
The Best Defense Stocks for your portfolio have a history of annual dividend increases, are acquisitive and projected to grow revenue double digits in the next four years. We’ll tell you what they are and how you should be trading them now. Click Here To Go Straight To Our Top Defense Stock Picks
Trump’s Budget Good For Defense Stocks
President Donald Trump released his 2019 budget proposal in early February, and has defense stocks on the move.Relative to the February market correction, defense stocks are outperforming the broad market rebound and poised to make big gains in 2018. This means opportunity if you know where to look.
Defense spending and rebuilding the military were one of the President’s campaign promises, and one he intends to make good on over the next few years.The budget was met with mixed reviews, but does include a substantial sum for defense spending. The importance of which should not be discounted.
The official request for $716 billion is 7% higher than the previous year, and does include an additional $30 billion listed as “other” intended for non-military defense needs. The base $686 billion includes $69 billion to fund overseas operations along with increases The additional $30 billion was earmarked for things such as the Energy Administration’s supervision of our nuclear arsenal and other non-military defense needs.
Why are defense stocks up? Because the new budget is a boost for the sector that is expected to spur revenue growth for the next five years. The military will have the money to do what it needs for the first time in a decade and the Pentagon is ready to start spending. This means more money spent on new troops, better equipment and the materiel needed to operate in a modern theater of war.
Materiel; anything used by the military or included in military technology
What we want our readers to be aware of is the fact defense spending will see a significant increase next year. The increase is only the beginning of a longer-term plan to improve national defense. Annual increases are expected over the next five years that will put defense spending at historic levels and drive profits for defense stocks.
What is Driving Growth For Defense Stocks?
On the geopolitical front, rising tensions with North Korea, Russia, and China will ensure spending remains strong, and this will help support the defense sector. US NATO allies are also boosting spending to match the 2% of GDP target imposed by the treaty. France is only one of many nations to announce such plans in recent weeks, and will help the sector outperform the broad market.
What are defense stocks?
Defense stocks, not to be confused with defensive stocks, are the stock of companies engaged in business with the government or military for national defense. They include technology companies, shipbuilders, armament manufacturers, and suppliers of materiel.
In today’s world, this includes engineered clothing for extreme conditions, all the way through the latest experimental fighter jets, missiles, and stealth ships.
Are defense stocks overpriced? Only relation to past administrations. With the defense budget expanding for the first time in nearly ten years shrinking revenue is not expected. What is expected is double-digit revenue growth for defense stocks and opportunity for our readers.
What defense stocks to buy in 2018
We expect the main theme of 2018 to be mergers & acquisitions, as key players within the industry scoop up smaller operators to expand product offerings and revenue streams. The top three in the group are going to see share prices rise as revenue and profits increase through organic and acquired growth. These are Lockheed Martin, Northrop Grumman, and Raytheon.
The Three Best Defense Stocks For 2018
Lockheed Martin (LMT) – Lockheed Martin may seem expensive compared to the broader market but it’s inexpensive for a defense stock. It is trading with a P/E near 24 compared to an average 16.9 for the S&P 500 and 29.9 for the defense sector, but let’s face it, a company like this deserves a premium. The stock is trading near $360 and all-time highs driven by a track-record of growth and dividend increases that has been super-charged by Trump’s budget plans.
The company operates in four segments: aerospace, missile & fire control, rotary, and space. All four are expected to benefit from the budget. The space segment is expected to outperform the others as Lockheed is the primary supplier of military satellite technology.
Aside from the boost delivered by Trump’s budget, Lockheed Martin share prices are supported by a cycle of dividend growth. Companies with a record of dividend growth are known to attract new investors who drive prices up. Usually what happens is share prices move up in tandem with dividends maintaining a relatively stable pay-out ratio between the two. Investors can take advantage of this trend by targeting companies like this in order capitalize on income growth and capital appreciation.
The company has been delivering dividend growth for more than 15 years. The last three years have seen dividend growth above 10%, with all four of its business segments poised to benefit under the new budget robust dividend growth will continue. Our twelve-month price target for this stock is $440.
Northrop Grumman (NOC) – Northrop Grumman may be most recognizable for its stealth bomber, the B-21 Raider. It is a leader in many fields of military technology. The company operates in five areas that include aerospace, mission systems, cyber capability, intelligence and logistics. The recent acquisition of Orbital ATK has made them a leading manufacturer of missiles and space capable mission systems. ATK Orbital is a US defense contractor specializing in space and aerospace technology. It services both the military and private industry.
Northrop Grumman distinguishes itself in the field of cyber technology. The military’s number one concern when it comes to cyber technology is security, and these guys have the largest cyber security business of all military contractors. The business is expected to grow revenue by at least 12% over the next five years, not counting the impact of future acquisitions.
This stock pays a dividend that yields about 1.25% at today’s share prices. It also has a history of dividend increases dating back at least ten years and is expected to increase it again this year. The stock is not cheap trading near $355 but is fairly valued relative to its peers with a P/E near 22. Our 12-month price target is $460.
Raytheon (RTN) – Raytheon is one of the more affordable defense stocks Trump has boosted with his budget and trades with a share price near $220. This stock has seen share prices double in the last year and maybe the most overvalued stock in the group when looking at past earnings. When looking at forward earnings, this growth-oriented contractor is trading at a P/E near 22.5 and fairly valued relative to others in the group.
It operates in five segments similar to the others with a specialty in the missile defense arena. The company is seen as the leader regarding integrated systems capable of warding off an attack from China, Russia, or North Korea. Both China and Russia are working on hypersonic missiles capable of taking out aircraft carriers so there will be demand for their product.
The stock pays a dividend yielding about 1.45% at today’s prices with a good but not stellar history of increase. While the trend in distribution is up, it has increased nearly 200% in the last ten years; the rise has been marred by two temporary decreases. The company is expected to grow revenue by 25% over the next five years, so we are only expecting to see the dividend increase. Our 12-month price target is $280.
Defense Stock ETF’s: A Better Value For Investors
Looking for defense stocks under $10, defense stocks under $5? Good luck. Any stock worth your time is likely trading far higher than $10, and there is a reason for it. These companies are valuable; they have contracts with the government that ensure their continued success. Trump’s budget plans reaffirm those contracts, and that is the opportunity we are talking about today.
The good news is that you can get exposure to the defense sector with an ETF. You could look to a mutual fund, but there are many reasons why ETF’s are better, including cost. ETF’s are passively managed which lower management fees and higher rates of return on the investment. Even larger investors can reap benefits of these ETF’s as they allow broad exposure to the sector.
iShares US Aerospace And Defense ETF(ITA) – The iShares US Aerospace and Defense ETF holds our top three picks in its top five holdings. They average 7% of the portfolio each and sit next to other top names in the defense stocks index. The ETF trades near $200 and pays a distribution yielding 0.85% at today’s prices.
The ETF has just hit a resistance level that will likely result in a retest of support at recent lows. This means a possible discount of 10% to today’s prices for our readers. In today’s market, there is no guarantee a pullback will occur. If prices continue to test resistance at $210 and break above it, long positions should be taken. Our targets when resistance breaks are $225 in the near term and $300 over the next 12 to 18 months.
PowerShares Aerospace & Defense Portfolio ETF (PPA) – The PowerShares Aerospace & Defense Portfolio is our top pick for best defense stocks ETF. It has been trading at a reasonable $50 per share, but that is not going to last long with the outlook for the sector so bullish. It also includes all three of our top picks, all within the funds top ten, along with a blend of complementary holdings. The downside is that management expenses are a bit more than with the ITA but still well below what you would lose to a mutual fund or closed-end fund manager.
This ETF has also recently hit resistance that may lead to lower prices in the near term. Longer term trends remain up and supported by earnings outlook. A dip to $52 would be ideal but not likely. A dip to $56 or maybe $54 is possible and should be viewed as a buying opportunity if presented. The other possibility is that prices will not retreat to retest support levels and will resume the uptrend. A move to new highs would be bullish. Our price target on such a move is $64 in the near term and $112 over the next 12 to 18 months.
The bottom line is simple. Trump’s new budget is good for defense stocks. Spending is going to increase next year for the first time in nearly a decade and grow over the following five years. This news has the best defense stocks moving higher, but not all will receive the same benefits. The best defense stocks are growing organically and through acquisition, expected to increase annual revenue by double digits and outperform the broader market.