The defense sector has been under pressure as the future military spending is moving away from the giant expense items. This week’s news was that $100 billion is the target goal to take out of the defense spending budget. Raytheon Co. (NYSE: RTN) was featured in proprietary Thomson Reuters research this morning as being the “cheapest” against peers and as a very contrarian play. Comparisons were made on their research scorings against peers such as Lockheed Martin Corporation (NYSE: LMT), Northrop Grumman Corporation (NYSE: NOC), General Dynamics Corp. (NYSE: GD) and others.
We always take a look at some other factors on our own before endorsing any outside research. This is a very contrarian call, and a very gutsy call at that. What you have to assume is that there is business disruption in some of the extremely high-ticket items. That would put things on shaky ground for the near-term and intermediate-term at Raytheon and other defense companies.
Raytheon seems to be the most vulnerable on the surface to many of the military spending cuts that would be targeted. This Thursday just brought on a new 52-week low with shares hitting $44.23. The 52-week trading range was $4.74 to $60.10 before today and the early 2009 panic selling lows were down in the mid-$30’s for a comparison.
Our own biggest question on the defense cuts really comes down to how much the cuts will ‘really’ be. We see cuts. The contrarian research given above from Thomson Reuters makes a case that there will just be lower and lower growth in the spending. The issue comes down to what the lobbyists and what each politician at the local level can secure.
If the spending cuts are half of what has been expected, then the defense sector has been oversold. If there is going to be an outlier event where there is just less growth rates, then the defense sector will have been grossly oversold. All of these stocks are well off of highs.
iShares Dow Jones US Aerospace & Defense (NYSE: ITA) is a diversified ETF that holds defense and aerospace stocks in it. At $50.99, it is down about 15% from its 52-week high. Did the defense sector get cheap enough to be considered “value” for value investors? Maybe. It is hard to imagine that the value will see immediate interest, but that is what makes a ball game.
It is hard to go broadly endorse the sector when you know there is political and fiscal pressure to slash budget expenses. This is admittedly a call that may take a long time to pan out. Either way, this is a gutsy contrarian call.
JON C. OGG
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