It's the tweet heard 'round the world ... again. I am talking about the tweet by President-elect Donald Trump blasting still one more industry for charging the government too much.
Here's the tweet from @realDonaldTrump: "The F-35 program and cost is out of control. Billions of dollars can and will be saved on military (and other) purchases after January 20."
Lockheed Martin (LMT) makes the F-35, but there are plenty of subcontractors including Pratt & Whitney, the division of United Technologies (UTX) that I visited last week and is responsible for the jet's turbo engine. It's Lockheed's stock, though, that has borne the brunt of the tweet, falling more than 4%.
Now, let's understand that this Joint Strike Fighter program has a long history of billions and billions of dollars of overruns dating back 15 years. In fact, back at the beginning of November, the Department of Defense decided unilaterally to cut the cost of the next batch of jets by 3.7%.
Lockheed Martin hasn't agreed to that rollback. So it's been a standoff between the two. It sounds like Trump's out to drive a much better bargain than that small rollback.
Once again, Wall Street's been drawn offsides here. The defense stocks have roared since the election as Trump talked tough on defense throughout the campaign. But he's also famously against "the swamp," the kind of built-in coziness that has often been the case between the government and the lobbyists pushing for different industries, in particular defense. He's no fan of the military-industrial complex.
Now does he really have the ability to drive down the cost of the jet? I think until a few weeks ago we might have thought a campaign promise like draining the swamp was just campaign talk and that he wouldn't be involved in the actual jawboning of companies to do what he wants.
But then he called Greg Hayes, the CEO of United Technologies, to get him to keep Carrier jobs from leaving Indiana for Mexico. Greg agreed to keep about half of those jobs in Indiana. Why? I think that while Trump didn't threaten to take away some of the $6 billion in defense contracts that United Technologies has, the message got across, as Hayes suggested when he said he was born at night but not last night.
No threat needed.
Then we got the "bargaining" over Air Force One, where Boeing (BA) CEO Dennis Muilenburg agreed to talk to the president-elect about lowering the cost of the two planes the government has ordered.
Then last week we got Time magazine's Person of the Year interview where Trump vowed to go after those drug companies that raise prices exorbitantly, again with the idea that the government's not going to pay as much as it does now for them.
I think you see the pattern. If a company relies on the government for a big chunk of recompense, that stream of revenue is now in jeopardy. Who knows, for example, if Trump will call Marilyn Hewson, CEO of Lockheed Martin, and say, "Look, I want 2,400 of those planes" -- the actual number the government wants -- "but I am only paying for the first 2,000 and you are giving me the rest free."
Or how about if he calls Boeing again and says, "Hey, over the weekend I saw you got $16.6 billion for 80 passenger jets from Iran. Sorry, I am going to have to cancel that order because we are going toe-to-toe to redo our deal with Iran, and to show we mean business we're killing that order. We will make it up to you."
That's why I think you need to examine your portfolios and ask yourself, can you handle the risk of owning shares in a company that feeds at the trough of the feds? It's a risk factor and if you don't account for it, you could find yourself on the receiving end of a tweet or a call.
Drug companies and defense contractors are the obvious losers here. But you need to think about companies that need government approvals -- like the Time Warner (TWX) -AT&T (T) deal he has said he doesn't like. You need to think about those who want to pull out of the U.S. for some manufacturing. (Lockheed and Martin and AT&T are part of TheStreet's Dividend Stock Advisor portfolio.)
I am not saying to sell the shares in these companies. I am saying, Trump cuts both ways. Don't be fooled. He's a tweeter-in-chief, he's a negotiator-in-chief, and right now at least, he seems to have all the cards.