• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Industrials

Defense Stocks as Defensive Investments

A few in the group are better positioned to withstand rate hikes.
By ROGER ARNOLD Dec 11, 2014 | 06:00 PM EST
Stocks quotes in this article: LMT, GD, RTN, NOC, SAIC, CACI, BA

One of the big political themes in the U.S. this year was President Obama's announced intention, outlined in the State of the Union address in January, to shift government fiscal allocation away from military spending and toward domestic infrastructure spending. This set up a dynamic between the two principal groups of companies (and their stocks) that would be impacted by the shift: government contractors and infrastructure companies.

Once Russia entered Crimea, however, the potential for the shift in fiscal allocation became politically improbable. This was underscored by the results of the midterm elections and the Republicans taking control of the Senate.

Stocks of the largest government contractors benefited from the Russian move into Crimea, but received an even bigger boost from the midterm election results. Those results have clearly paved the way for a reprieve from the potential shift in fiscal allocation, at least until after the next presidential election. Investors in government contractors will likely get a free ride until then as these companies will continue to be recipients of government largesse regardless of what happens in the private economy.

The year-to-date performance of all but one of the largest government contractors has indeed been stellar: Lockheed Martin (LMT) +28%, General Dynamics (GD) +50%, Raytheon (RTN) +18%, Northrop Grumman (NOC) +28%, Science Applications International (SAIC) +59% and CACI International (CACI) +21%. About half of these returns were achieved in the last three months as investors began to anticipate the outcome of the midterm elections. The only company in this group with a negative YTD performance is Boeing (BA), which is down 9%.

The global and domestic political situation has not been the only driver of the positive performance of this group, however. These companies have been buying back shares and reducing their outstanding floats in order to manage growth in earnings per share. Still, only two of them have been buying back stock with earnings as opposed to cheap debt capital: Lockheed and General Dynamics. As a result, of all the names mentioned, these two are likely best positioned to continue to perform regardless of private sector economic activity and what may happen to interest rates.

The share buyback plans that are being enhanced through debt will be negatively affected if the Federal Reserve carries through with an increase in the Fed funds rate next year, as it is indicating and markets believe. I do not believe the Fed will raise rates next year (I will address that and the trajectory for long-term rates in a separate column), but as this column is about defensive strategies, Lockheed and General Dynamics are the two best positioned to withstand rate hikes.

Boeing is an interesting situation. It too has been buying back shares this year with earnings, and quite aggressively, with a reduction in float of almost 5%. This is similar to the 6% reduction in float by General Dynamics this year, but investors have not responded in the same manner. I'm not quite sure why, but it could be because of Boeing's inventory build earlier in the year, which caused a near-term hit to earnings. Still, I would think investors would see through that.

All of the other companies mentioned are trading at record highs, while Boeing is about 14% below its peak, set this past January. As such, and given the fact that it has strong earnings, is buying back shares through earnings and is less sensitive to rising interest rates than most of the others, Boeing represents the best defensive and offensive play in the group. 

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Arnold had no positions in any of the securities mentioned.

TAGS: Investing | U.S. Equity | Industrials

More from Industrials

At What Price Is Ballard Power Systems a Buy?

Bruce Kamich
Jan 15, 2021 3:09 PM EST

Let's check out the latest charts of BLDP.

Honeywell Jumps Into Vaccine Distribution but its Prices May Weaken

Bruce Kamich
Jan 15, 2021 9:14 AM EST

Let's review the charts and indicators.

Another Look at the Charts of Plug Power

Bruce Kamich
Jan 8, 2021 9:56 AM EST

Pay attention to the Japanese candlestick.

3 Breakout Candidates Living in the Materials World

Ed Ponsi
Jan 7, 2021 8:30 AM EST

The charts of U.S. Steel, Freeport-McMoRan and DuPont suggest that the surge in their shares may have just begun.

Markets React to Georgia Elections, Banks and Industrials to Gain, Oil Reduced

Stephen Guilfoyle
Jan 6, 2021 7:24 AM EST

I will have to give some of my favorite tech names a haircut in the name of balance. Hopefully everyone gained some exposure to gold.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 09:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    When it's time to sell, will you act or freeze?
  • 08:35 AM EST GARY BERMAN

    Wednesday Morning Fibocall for 1/13/2021

    Lower highs... SPX (Long-Term View) The 1/8/2...
  • 08:07 AM EST GARY BERMAN

    Tuesday Morning Fibocall for 1/12/2021

    Watch if the recent trend of lower highs continues...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login