Although aerospace and defense stocks came back to earth as fast as a failed missile launch last week, the sector remains underpinned by favorable fundamentals.
President Donald Trump, a proponent of a strong U.S. military, allocated generously to the 2020 defense budget, ramping up the Pentagon's spending power to $738 billion – an increase of $21 billion, or almost 30%, from 2019. Meanwhile, Iran's January strike on Iraqi bases housing U.S. troops in response to the White House killing a top Iranian general in Baghdad highlights ongoing geopolitical instability in the region.
On the election front, Joe Biden's improved performance in the Democratic primaries should continue to boost the space given the former vice president's support for larger defense budgets compared to his rivals within the party.
Below, we take a more detailed look at three aerospace and defense companies that look well placed to cash in on increased government defense spending and point out several tactical ideas for active traders.
Lockheed Martin Corporation (LMT)
Lockheed Martin Corporation (LMT) develops and manufactures defense technology systems, products, and services through four divisions: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems. The maker of the F-35, a fifth-generation stealth jet, secured a $34 billion contract with the Pentagon in the fourth quarter to deliver 478 of the aircraft. Trading at $402.03 with a market capitalization of $113.35 billion and offering a 2.54% dividend yield, the stock has gained 3.87% year to date (YTD), outpacing the aerospace and defense industry average by about 8% over the same period as of March 5, 2020.
Lockheed Martin shares fell as much as 18% from their 2020 high but have promptly recovered to trade above crucial support at $390. Traders who expect further upside should set a take-profit order between $430 and $440 – an area the price may run into resistance from the January/February swing high. Manage risk by cutting losses if the stock reverses beneath yesterday's low at $383.19.
Northrop Grumman Corporation (NOC)
Northrop Grumman Corporation (NOC) manufactures aircraft and space-related products, such as radars, sensors, and surveillance systems, along with cybersecurity and information technology solutions. The $58.17 billion company's exposure to weapon modernization programs and reducing capital expenditure continues to support further growth. Wall Street has a 12-month price target on the stock at $423.75 – representing a 22% premium from Wednesday's closing price. As of March 5, 2020, Northrop Grumman shares yield 1.6% and have returned 1.26% on the year.
Bargain hunters returned to the stock at $320, where they found a floor from an area of 2019 summer price consolidation. Furthermore, Northrop closed yesterday's session above intermediate resistance at $340 in a move that could see a test of a prominent double top chart pattern. Those who buy here should book profits near $380, while keeping downside limited with a stop positioned under the March 3 low at $329.01.
Raytheon Company (RTN)
With a $56.06 billion market cap, Raytheon Company (RTN) develops integrated defense intelligence and information products, with about 70% of revenue coming from the U.S. government. In February, the U.S. Air Force announced that it plans to award the Waltham, Massachusetts-based firm a potential five-year, $125 million contract to update the software of its AIM-120 Advanced Medium-Range Air-to-Air Missile system. Raytheon stock has added 11.65% over the past year but has struggled YTD, dropping nearly 8% as of March 5, 2020.
The defense equipment maker's share price plummeted to a six-month low last week before stabilizing between $185 and $190, where the stock finds support from the top portion of a previous trading range. In other signs of improving sentiment, the relative strength index (RSI) clawed its way out of oversold territory yesterday, which coincided with a close back above the 200-day simple moving average (SMA). Traders should look for a move up to key resistance at $230 but exit if price struggles to hold $190 support.