• 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

As a Defense Tech Play, I Like Mercury Systems

If the United Technologies/Raytheon deal makes any smaller defense name attractive, it might be this one.
By STEPHEN GUILFOYLE
Jun 11, 2019 | 03:20 PM EDT
Stocks quotes in this article: PPA, XAR, ITA, UTX, RTN, LMT, NOC, GD, KTOS, MRCY

Fire In The Hole

The group had been hot. Spending on defense had run higher, not just here, but across the developed world for a couple of years. Just as it became apparent that perhaps future Pentagon spending might have to contract as government once again becomes concerned about ever increasing deficit spending, a potential cold war breaks out with China, dressed up as a trade war. The S&P 500 is now up 15% year to date. The defense and aerospace industry? Not bad at all. The Invesco Aerospace & Defense ETF (PPA) has run 29%, the SPDR offering (XAR) , a cool 28%. iShares (ITA) brings up the rear of this trio at 22%. All beating the broad market indices.

This day (Tuesday), the broad equity market teeters just a bit after opening higher. We have spoken of this often as trading volumes were not in my opinion, substantive enough to support the run enjoyed over the past five days or so. As a sector, the Industrials are selling off to a greater degree than are any of the other 10. Within that sector, the Aerospace industry is selling off significantly harder than anything else in the sector. Growth? Rare Earths? An improvement in the prospects for a trade deal with China? A deterioration in prospects for a trade deal with China? Perhaps the $2 billion-plus arms sale to Taiwan is falling apart as trade negotiations advance. Hmm. Let's explore.

You Might Have Thought

One might have expected that after United Technologies (UTX) and Raytheon (RTN) decided to start spending Sunday afternoons together reading poetry that maybe there would be a push to consolidate across the realm of defense contractors. Maybe that's just it. Maybe, although a day after the fact, there is realization that there might not be enough dough around to support this industry where it is, or at least that's the feeling right now. Rotation? Well, when the entire industry gets hit in the teeth like this, without an overtly negative catalyst, yeah.

What Am I Doing Amid The Carnage?

Well, I am pretty active this afternoon to tell you the truth, but not in size. These look like sale prices, but as my friends who also trade this group well know, selloffs in this space can last... and last. Today is a good example why I rarely (almost never) buy or sell an entire position in one transaction. Incremental trading might not necessarily win championships, but it surely keeps me in playoff contention.

If you follow me often, then you know that Lockheed Martin (LMT) has been my flavor of the season. That stock has run nicely, was just awarded a $1.8 billion contract for F-35 fighter aircraft by the Pentagon. I am up quite a bit on a nice sized long position in LMT, and a 2% haircut does not scare me off that easy. That one, I watch for now.

Raytheon and United Technologies are a horse of a different color. I have been long RTN for a good while, and that name had just started to perform. I entered UTX is small size on Monday, thinking the idea of spinning off Carrier and Otis might be the play. Twenty-four hours later, that looks like a mistake. That said, it's small and I will likely add a similar amount. This illustrates exactly my point up top. Northrop Grumman (NOC) looks interesting below $300. That firm just landed a $958 million ground-air radar contract. I do not have a position currently, but this is my second favorite name in the space right now. General Dynamics (GD) makes the M-1 Abrams tank. Taiwan was looking to buy 108 of those. This might be a tough name to enter right now if not already there.

Bargain Shopping?

Last Monday, Kratos Defense (KTOS) landed a $31.8 million award from the U.S. Air Force to provide 35 target aircraft for training purposes. The next day, Goldman Sachs downgraded the name to Neutral from Buy, but upped their target price from $22 to $24. In all fairness to Goldman, their original target price had been met. That was a nice call. I am long 50% of my original position in this name having jettisoned 50% above my target, which was also $22. I am not adding here.

Mercury Systems (MRCY) is another defense electronics type name that I trade. The stock has had a great 2019, but has faded after peaking in early May, and then bringing 6 million shares to market in a secondary offering on May 23rd. If the UTX/RTN deal makes any smaller defense name attractive, it might be this one, as a defense tech play. I have other names in mind, but I am long this name, about 25% of a position, so I probably should not opine on that. I like this one enough to add at a discount.

Most analysts will likely see the cup formation (orange), some might see the handle. Fewer will recognize that since coming out that pattern, the name has traded almost with precision as out twelfth century Italian mathematician friend would have had it.

Mercury Systems 

Target Price: $81

Add: $64

Panic: $62

Note: $68 was where the right side of the orange cup peaked. This area could prove funky. Okay, in my opinion to add there with the understanding that the door could swing from there, in either direction. I save dry powder for $64 just in case.

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, Stephen Guilfoyle was Long LMT, UTX, RTN, KTOS, MRCY equity.

TAGS: Investing | Markets | Stocks | Technical Analysis | Trading | Defense

More from Investing

Jim Cramer: What History Tells Us About Bond-Rate Scares Like This

Jim Cramer
Feb 27, 2021 2:01 PM EST

We could have some real pain ahead for some stocks. Five different kinds.

What's Next for Bonds, TLT and Interest Rates?

Bruce Kamich
Feb 27, 2021 12:30 PM EST

Thoughts and observations on Treasuries and the direction of interest rates.

Navigating a Market Correction

James "Rev Shark" DePorre
Feb 27, 2021 10:00 AM EST

The most critical factor in long-term market success is the ability to effectively navigate market corrections.

Kass: Time to Introduce a Financial Transaction Tax and End Weekly Stock Options

Doug Kass
Feb 27, 2021 8:15 AM EST

I believe more sensible regulations should be considered and enforcement is needed to adapt to gains in technology.

Corrective Action Produces Fading Confidence and Technical Damage

James "Rev Shark" DePorre
Feb 26, 2021 5:08 PM EST

It's dangerous to have too much exposure now, but the potential for a good recovery is there once interest rate issues are digested.

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

  • 11:32 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Navigating a Market Correction
  • 11:29 AM EST GARY BERMAN

    Where Does the Nasdaq Go From Here?

    Where does the Nasdaq Composite (CCMP) index go fr...
  • 12:31 PM EST GARY BERMAN

    Has the Short-Term Top Come for the XLF/Banks?

    The has triggered a long-term overbought signal ...
  • 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