The following is a condensed version of our advice to Newsvestors following a sudden drop in the markets in early January 2016, followed by an examination of how our recommendations performed as we reach New Years 2018.
“Yes, the jolting dip that the financial markets took on their first day of trading in 2016 was a bit of a shock. And yes, it probably had a lot to do with China and its lagging economy. But in reality, the backdrop to the losses of Monday had more to do with unrest and agitation on the geopolitical stage than the economy of one more or more of the major players on that stage.
All at once, serious potential aggression between Iran and Saudi Arabia have merged with an aggressive and assertive Russia and the burgeoning Chinese military to create a sense of uneasiness in the international community not felt since the fall of the Soviet Union. Make no mistake, we have entered an international arms race that is running at brake neck speed. And it’s not just about traditional weapons such as fighter jets and ballistic missiles. This s instead a race that spills over into technology ranging from drones-to-cybersecurity systems. And it has only just begun.
In our book “Newsvesting” we explain why we started investing in major defense contractors and manufacturers in 2014 and 2015. In essence, the absence of a coherent plan for dealing with the fallout from the so-called “Arab Spring” of several years ago, which brought destabilization to areas of the Middle East, coupled with a U.S. led nuclear agreement with Iran have fueled a massive growth in defense related contracts and, as a result, huge growth in the value of shares in many companies in the sector.
While China’s productivity may appear to be lagging, the massive growth of its military and its weaponry has continued unabated. Ditto for Russia. Add to that fears by nations ranging from Israel to Saudi Arabia of a future “nuclear” Iran, and the race for arms and defense related technology makes complete sense.
Buying While Others Sell
The first day of trading in 2016 saw the proverbial baby thrown out with the bath water. Defense stocks suffered the same losses as did financial companies, the technology sector, and virtually every other sector of the markets. And while others were selling, I was buying. And I intend to continue to buy strong defense related companies as we wing our way towards a realization by Wall Street that the world is not on fire, but certainly heating up at a very rapid rate.
In a year where most “experts” predict the stock market to have modest, if any, gains, the need arises to search for dividend yielding stocks that will deliver both short term income and long term potential growth. If that makes sense then certainly some major defense names are right on the mark for such a strategy.
In “Newsvesting” we chose big name defense contractors Lockheed Martin (LMT) and Northrop Grumman (NOC) as stocks to invest in through 2014-15. Both pay reasonable dividends and both have enjoyed substantial growth in their per share price over the past two years. JP Morgan places Lockheed Martin as a top dividend stock for 2016. Not only is the company seeing an abundance of new contracts in diverse areas of defense technology, but its devotion to its dividend and to repurchases of outstanding shares makes LMT a highly attractive long term hold. LMT shares dropped $3.94 in Monday’s “China panic.” Investors should pay for more artificial downdrafts for defense stocks such as Lockheed Martin.
Then there is Northrop Grumman (NOC). NOC is a true beneficiary of the upturn in U.S. military spending, which puts it on the highest list for defense holdings as listed by Goldman Saches. Their “committed” list of attractive defense stocks includes Harris (HRS), Orbital ATK (OA), and FLIR Systems (FLIR). Northrop has a lower dividend yield than Lockheed Martin, but is viewed by many as having more growth potential. Both NOC and LMT were winner in 2015, with performances that far exceeded the tepid Dow and S&P.
Another favorite,is Elbit Systems (ELST), a smaller cap defense company with a yield of close to 2% and another example of a big winner in 2015. Its 52 week low is $59.91. Even after Monday’s brutal market, its prices was $86.65. And Elbit has plenty of room for growth. There is one caveat with ELST—it is thinly traded and thus seemingly a bit more risky. But its drone-related technology is much sought after around the world.
For a number of years, defense stocks have seemed less than “sexy.” But with the world dealing with the resurgence of old military powers, the emergence of new threatening powers, and the growing threat of terror from new sources, the defense industry is a true buy and hold.”
SO HOW DID WE DO? Take a look at our January 2016 picks as of the end of the week of January 8, 2016 and the week of December 22, 2017!
LMT: $215 ’16/ $318 ’17
NOC: $188 ’16/ $305 ’17
HRS: $86 ’16/ $143 ’17
OA: $91 ’16/ $132 ’17
FLIR: $30 ’16/ $47
ESLT: $86 ’16/ $134