Lockheed Martin (LMT) Sells Off Despite Strong Quarter

Lockheed Martin Corporation (LMT) is trading lower on Tuesday despite beating top- and bottom-line third quarter 2020 estimates, posting a profit of $6.25 per share while revenue rose 8.8% year over year to $16.5 billion. The defense giant also increased fiscal year 2020 guidance and now expects to earn $24.45 per share on revenue of $65.25 billion. Looking ahead to 2021, the company said that sales should equal or exceed $67 billion, compared to a $66.4 billion consensus.

Key Takeaways

  • Lockheed Martin stock is selling off despite strong quarterly results.
  • Worries about a Democratic administration cutting the defense budget have contributed to weak 2020 returns.
  • Worldwide nuclear threats should keep a floor under the stock for years to come.

The sell-the-news reaction perfectly matches Lockheed's weak 2020 performance. The stock closed out 2019 at $389.38 and is currently trading at $383.01, posting a small loss despite impressive growth. Supply chain disruptions as a result of the pandemic weighed on profits in the first quarter, while uncertainty about the presidential election are now encouraging investors to take a more cautious approach. 

That concern may be unwarranted because Democratic and Republican administrations have supported enormous defense budgets over the years and the world is growing more dangerous, with potential nuclear threats from Iran, North Korea, and other players. Lockheed manufactures the world's top-selling defense systems, and it's hard to imagine the United States and allies forgoing purchases of that expensive equipment in coming years.

Wall Street agrees with the bull case on Lockheed Martin, posting a consensus "Strong Buy" rating based upon six "Buy" and two "Hold" recommendations. No analysts are recommending that shareholders sell positions and move to the sidelines ahead of the election. Price targets currently range from a low of $419 to a Street-high $509, while the stock is now trading $27 below the low target. The current political atmosphere is most likely the reason for this disconnect.

A supply chain is a network between a company and its suppliers to produce and distribute a specific product to the final buyer. This network includes different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer.

Lockheed Martin Weekly Chart (2013 – 2020)

Chart showing the share price performance of Lockheed Martin Corporation (LMT)

The stock broke out above the 2008 high at $120.30 in 2013, entering a powerful trend advance that eased into a rising channel in 2014. Price action held within those boundaries into the first quarter of 2018 and entered a trading range that broke channel support during a fourth quarter breakdown. It fell to a two-year low in December and bounced into 2019, returning to the prior high in the third quarter.

The subsequent breakout posted an all-time high at $442.53 in February 2020, ahead of a vertical slide that stretched 168 points to a 15-month low. The subsequent bounce recouped about 80% of the downside before stalling in June and easing into a narrow consolidation on top of the 50-week exponential moving average (EMA) at $375. A breakdown would favor a trip back to the July low near $340, which marks solid support. That could happen as a knee-jerk reaction if Biden wins an uncontested election.

The on-balance volume (OBV) accumulation-distribution indicator posted an all-time high with price in the first quarter and entered a distribution phase that hit a 15-month low in July. OBV bounced off that level and eased into a holding pattern that matches indecisive short-term action. Meanwhile, both weekly and monthly relative strength indicators have rolled into sell cycles, predicting lower prices and volatility as Americans choose their next president.

Relative strength is a technique used in momentum investing and identifying value stocks. It consists of investing in securities that have performed well, relative to their market or benchmark. For example, a relative strength investor might select technology companies that have outperformed the Nasdaq Composite Index or large-cap stocks that are laggards against the S&P 500 index.

The Bottom Line

Lockheed Martin stock is selling off despite a strong quarter, indicating that election anxiety is controlling price action.

Disclosure: The author held Lockheed Martin in a family account at the time of publication.

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