Gen. James "Mad Dog" Mattis is going to be Donald Trump's defense secretary and his job, primarily, will be to rebuild the military. Trump is giving Mattis that responsibility because a) he's a "soldier's soldier" with a long and distinguished military career and he ran Centcom and b) he differs from Trump on geostrategy -- primarily his views on Russia and Vladimir Putin. Mattis is a hard-liner; Trump is open to normalizing relations with Russia, which makes him more aligned with his national security adviser-designate, Gen. Mike Flynn.
Mattis will be in charge of the Defense Department's budget, which is over $600 billion annually, not including supplemental budgets for wars and whatnot.
On paper, this should be "party time" for defense contractors and for investors in defense stocks. However, when looking for names I find that most of these stocks are pricey at least by my criteria, which for me, means elevated P/E ratios.
Starting with what I'll call the "Big 5," that is, Lockheed Martin (LMT) , Boeing (BA) , Raytheon (RTN) , General Dynamics (GD) and Northrop Grumman (NOC) , they mostly have P/Es right around the P/E of the S&P 500, which is near 22. So, if you think the S&P is "fairly valued" or even undervalued, then it's worth taking a stab. Note: All of these shares have risen appreciably over the past two years.
Among the big names I guess Raytheon is not too bad with a trailing P/E of 20. That's below the P/E of the S&P 500 at least, and the company's forward P/E is under 20. Raytheon is a technology company specializing in communications, sensing, missile defense and intelligence and surveillance. It could do quite well.
Actually, General Dynamics doesn't look too bad for one of the "Big 5." It has a trailing P/E of 18, which is a good bit below that of the S&P 500. The stock has shot up recently and I'd be looking to buy it on pullbacks.
Another one of the Big 5 that could be interesting is Northrop Grumman, which is trading with a 21 P/E.
All these stocks are up a lot in price so in that regard they are no bargain either. However, that doesn't mean they can't go higher. It's just not my style to buy high, even if there's a chance that it can go higher. I like buying low.
Aside from the Big 5, here are a couple of other names that you might want to consider.
The first is Honeywell International (HON) is trading with a 17 P/E, which is cheap compared to the those I just mentioned and many others in the sector. It also pays an annual dividend of 2.4%. Honeywell has an aerospace division that makes aircraft engines, avionics systems, sensors, switches, controls, etc. This stock is trading at around $114. Buy it on pullbacks.
Next is Textron (TXT) , which is trading a little above $47 per share, has a trailing P/E of 15 and a forward P/E of 17. That looks very cheap compared to its peers. Unfortunately, there's not much in the way of dividend yield, only 0.17% annually. The company is famous as the manufacturer of Bell Helicopters, which are used by the military. In addition, Textron makes unmanned aircraft (drones), weapons, sensors and simulation training systems.
Finally, there is Aecom (ACM) . Consider this one only if you believe its forward P/E of 12.74. (Trailing P/E, 60.74.) The company designs and builds infrastructure assets for governments and business. Might be a "flyer." Stock trading around $38.