By now, anyone following the latest news headlines coming out of the floors of the Senate and the House, and from the Whitehouse, will realize that there is going to be a massive injection of funds into the U.S economy over the next two years. Just how much, and where? Take a look at some recent headlines:
· “WASHINGTON — Senate leaders have reached a two-year deal that would set defense spending at $700 billion for 2018 and $716 billion for 2019” (DefenseNews.Com)
· “House passes budget deal and ends government shutdown…The deal includes: A $165 billion increase in military spending” (CNBC.Com)
As portfolio managers or individual retail investors, you’re probably thinking: What’s this got to do with my portfolio? Well, let me explain.
Reading Between the Headlines
The $700 billion won’t just go towards military pensions, Veterans health care or post-retirement benefits for our troops. A major portion of it will go towards military equipment and technology. Unfortunately, because a lot of that spending is classified, you won’t know which companies will receive how much…but just a cursory bit of research can give you a fair idea who’ll receive the lion’s share.
So, if you position your portfolios now, to play the defense sector, you’ll likely be rewarded in the coming years.
Depending on what your portfolio looks like today, and what your investment style is, there are two ways to get defensive:
1) Individual Stocks
The best way to position your portfolio, to leverage the massive defense spending over the next two years, is to invest in select U.S defense contractors. Obvious names that come to mind include:
· Raytheon Company (RTN)
· Lockheed Martin Corporation (LMT)
· Harris Corporation (HRS)
· General Dynamics Corporation (GD)
· The Boeing Company (BA)
These contractors provide the Pentagon with a range of equipment and services, from high-precision guidance system, to bunker-busting munition, to stealth aircraft, secret communications and hardy tanks and personnel carriers.
Every one of these names has seen triple-digit increase in stock prices over the past 5 years. With traditional and non-conventional military conflicts raging all over the world, these beneficiaries of that $700 billion budget will most certainly see their profits rise in the coming years.
If you are averse to picking the best amongst the best of names individually, then you may consider going the ETF route. As with individual names, there are a number of defense and aerospace ETFs for you to consider:
· iShares U.S. Aerospace & Defense ETF (ITA)
· PowerShares Aerospace & Defense ETF (PPA)
· Reality Shares Divcon Dividend Dfndr ETF (DFND)
· SPDR S&P Aerospace & Defense ETF (XAR)
If you are cost-conscious, you need to check the individual websites to understand what the Net Expense Ratios (NER) for each of these products is. While the NER for this category of ETFs, as a whole, stands at 0.46%, the four names recommended here carry NER’s of between 0.35% and 0.85%.
With the exception of DFND, which has appreciated (just!) 92% over the past 5 years, all the other names have managed price appreciations of 150%+ over that time period.
Another, albeit less ambitious, way of playing the defense sector’s $700 billion-dollar budget infusion, is to add defense-associated health-care related names to your portfolio. Names such as Humana Inc (HUM), that provide health care services to the military through its Humana Military subsidiary, are likely to also receive a decent slice of the newly announced defense spending, which will most definitely flow to their bottom line.
The author does not own any of the stocks or bonds discussed in the article.