Many U.S. defense contractors are hitting bull market and all-time highs this week, fueled by continued speculation that military spending will rise substantially under the Trump administration. North Korean saber-rattling and flare-ups in other international hotspots have also underpinned the group, raising the odds that American forces will engage in a series of expensive new conflicts in coming years.
Military-industrial giants including Lockheed Martin Corporation (LMT) and Northrop Grumman Corporation (NOC) have attracted the majority of media attention in this well-established uptrend, but intense capital inflows should also benefit second-tier subcontractors and specialty operations. Identifying these under-the-radar plays requires extra effort because they are less likely to headline the evening news, but long-term ownership rewards could be equally impressive. (For more, see: Lockheed Martin CEO Predicts $100 Billion Increase in NATO Defense Spending.)
Three Lesser-Known Defense Plays
Canada-based contractor CAE Inc. (CAE) provides aviation training and flight simulation equipment to armed forces in many allied countries including the United States, South Korea and Australia The company's stock has traded on the NYSE since coming public on U.S. exchanges at $6.65 in 2002. The stock broke out above nine-year resistance in the lower teens in February 2017 and entered a powerful trend advance that has posted a series of new highs.
The rally entered a low-volatility rising channel in late May after the uptick cleared the first swing high posted after the breakout. Narrow but positive price action with few pullbacks tells sidelined market players to wait until a shakeout drops the stock into channel support, currently located near $17.30. That could happen before the stock reports fiscal first quarter earnings on Aug. 9. CAE pays a 1.71% annual dividend yield. (See also: Three Must-Own Defense Stocks.)
Heico Corporation (HEI) provides jet engine and other aircraft component replacement parts as well as aviation repair services. It also contracts with the defense satellite and spacecraft industry, with its Florida domicile offering a competitive advantage. A long-term uptrend topped out just above $52 in 2014, giving way to a broad rectangular correction with support in the mid-$30s. The stock broke out in May 2016, entering a channeled uptrend that is still in force more than a year later.
The stock stair-stepped higher in three rally waves after the November election and has just entered a fourth bull impulse, lifting to an all-time high in the mid-$70s. A two-week buying spike just reached channel resistance, telling informed market players to stand aside until a pullback works off the short-term overbought technical conditions. A decline that fills the July 3 gap between $72 and $73.50 should do the trick, offering a lower-risk buying opportunity near channel support. Heico pays a meager 0.21% annual dividend yield. (For more, see: Boeing Wins $14.3M FMS Contract to Supply Chinook Parts.)
KLX Inc. (KLXI) manufactures and sells small machine goods including bolts, clips, hinges and rings to the aviation industry. It also provides an assortment of industrial products and services to the independent oil industry, so this is a hybrid rather than pure military play. The stock came public at $47 in December 2014, trading as high as $50 in its first session and dropping into a steep downtrend that reached an all-time low at $25.33 in February 2016.
The stock rallied back to the post-IPO high in March 2017 and reversed once again, finding support in the low $40s, ahead of a rounded consolidation that has now completed a multi-year cup and handle breakout pattern. A rally above $53.50 should ignite substantial momentum, lifting price quickly toward $60, with a measured move target at $75 offering the potential of substantial gains to breakout buyers. KLX pays no dividend. (See also: 6 Largest Government Contractors.)
The Bottom Line
Defense contracting giants get the majority of media attention, but a broad swath of second- and third-tier subcontractors should also benefit from substantially higher annual military spending in coming years. (For related reading, check out: Defense Stocks Have Room to Run.)
<Disclosure: The author owned shares of Lockheed Martin Corporation (LMT) at the time of publication.>