U.S. defense and aerospace companies have posted strong 2019 returns, with the exception of The Boeing Company (BA), which has taken a major hit due to the 737 Max crashes. Dow component United Technologies Corporation (UTX) has performed exceptionally well during the period, posting a 36% return after losing more than 16% in 2018. The Connecticut-based conglomerate has now broken out above resistance in the $140s, setting the stage for continued upside in the new decade.
The stock has lifted into the ninth slot in Dow component performance, assuming a leadership role after Boeing's descent into the 25th position. United Technologies is currently the second highest-capitalized issue in the aerospace and defense sector, just above Lockheed Martin Corporation (LMT), with market cap growing steadily through key acquisitions that have included Raytheon Company (RTN), Collins Aerospace, and Goodrich.
United Tech relies on U.S. defense contracts for about 10% of revenues, but that number is expected to increase substantially after the Raytheon merger finalizes in the first half of 2020. That company holds the third slot in contracts, behind mega-caps Boeing and Lockheed. The acquisition will increase exposure to 2020 political forces, with some Democratic candidates calling for a drawdown in the U.S. defense budget. Even so, both parties have consistently supported the military with massive budgets in recent decades.
UTX Long-Term Chart (1993 – 2019)
The stock broke out above 1987 resistance at a split-adjusted $7.56 in 1993 and entered a powerful uptrend that posted impressive gains into the 1999 high at $37.99. A 2001 breakout attempt failed after reaching the low $40s, giving way to a vertical decline after the Sept. 11 attacks. It bottomed out at a three-year low near $20 and turned higher into 2002 but failed to break out until the fourth quarter of 2003.
That bullish impulse made little headway until 2006, when the stock took off in a healthy advance that topped out in the $80s in October 2007, when the mid-decade bull market came to an end. It sold off in multiple waves during the 2008 economic collapse, giving up nearly six years of upside before bottoming out in the mid-$30s in March 2009. The subsequent recovery wave completed a round trip into the prior high in 2011 but failed to clear resistance until 2013.
A strong uptrend into 2015 ended at $124, giving way to an intermediate correction that found support in the low $80s in the first quarter of 2016. A steady uptick reached the prior high in December 2017, triggering a rally that stalled quickly near $140. A September 2018 breakout attempt failed, yielding a steep fourth quarter rout, followed by 2019 upside that cleared resistance at $143 in November.
Price action over four years has carved a rising channel with resistance near $150 and support above $110. The stock is struggling to gain ground after reversing at channel resistance in November, but the monthly stochastics oscillator is fully engaged in a buy cycle that has crossed into the overbought zone. This positioning is highly bullish, at least until the upper line rolls over and crosses the lower line. As a result, a channel breakout is possible, perhaps as early as the first half of 2020.
UTX Short-Term Chart (2017 – 2019)
The on-balance volume (OBV) accumulation-distribution indicator posted a new high in February 2018 and eased into a sideways pattern that matched volatile two-sided action into year end. It finally broke resistance in November 2019, highlighting growing shareholder interest ahead of the Raytheon acquisition. Trade optimism may be also driving the upside, with a good chunk of company earnings dependent on a strong U.S. economy.
The stock has posted two marginally higher highs since January 2018, highlighting lingering weakness that has characterized United Tech price action throughout the decade. A large supply of skeptical investors may now be waiting for merger developments, which shouldn't run into major government roadblocks. A channel breakout would certainly improve the long-term outlook, setting the stage for more consistent upside.
The Bottom Line
United Technologies stock is poised to post strong gains in the new decade, but stubborn channel resistance could test the patience of loyal shareholders.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.