Defense contractors have been strong performers in presidential-election years and in periods of slow economic growth, analysts say. Expectations for strong Department...
Defense contractors have been strong performers in presidential-election years and in periods of slow economic growth, analysts say. Expectations for strong Department of Defense spending in the future also give the sector appeal.
“We continue to believe that one of the reasons defense stocks do well in a presidential year is that nobody wins by running on a platform of being weak on defense,” writes Citi Investment Research analyst George D. Shapiro in a client note.
He says Hillary Rodham Clinton is the strongest defense proponent among the Democratic candidates, and Mike Huckabee is strongest among Republican hopefuls.
But Shapiro says the defense budget will grow no matter who wins the White House.
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Morgan Stanley analysts say spending to refurbish and replace worn-out military gear will be one driver for the sector.
“The Iraq war and global war on terror will continue to require massive federal government spending in 2009-2012, regardless of the outcome in the November elections,” they write.
The fiscal 2009 budget, with spending forecasts for future years, will be submitted to Congress on Feb. 4.
Another positive for military contractors is their solid performance in times of slow U.S. growth, says UBS analyst David E. Strauss.
“While the defense stocks have now outperformed for four consecutive years, we think 2008 sets up well to further extend the streak,” he writes.
Since 1980, the sector has outperformed the stock market 75 percent of the time that growth in the gross domestic product has slipped below 3 percent, which UBS economists expect this year, Strauss writes.
Strauss prefers small companies, which trade at attractive prices relative to earnings and are more likely to be acquired than are large companies. He likes Alliant Techsystems (ATK) and DRS Technologies (DRS)
Among larger names, he likes General Dynamics (GD) and Northrop Grumman (NOC), which on Thursday beat profit and sales estimates.
Investors also can play the sector through funds such as PowerShares Aerospace & Defense (PPA) and Fidelity Select Defense & Aerospace (FSDAX).