First it was a stiff warning to North Korea about threatening the Pacific Rim with nuclear strikes. Weeks later, President Donald Trump said the U.S. would ratchet up anti-terrorist measures in Afghanistan, with 4,000 additional U.S. troops set for deployment in the region.
And now this week, Trump announced that he would allow Japan and South Korea to increase purchases of military equipment from the U.S. as North Korean leader Kim Jong-un continues his saber-rattling ways.
All has caused a stir on Wall Street, with defense stocks and funds marching forward in brisk fashion.
[See: 9 of the Most-Loved Stocks in the Trump White House.]
The benchmark SPDR S&P Aerospace & Defense ETF (ticker: XAR) up 19.1 percent so far this year, versus 10 percent for the Standard & Poor’s 500 index. Since Election Day, XAR is up 39 percent versus 19 percent for the S&P 500.
On an individual stock basis, defense industry stalwarts Northrop Grumman Corp. ( NOC), Boeing Co. ( BA), Lockheed Martin Corp. ( LMT) and General Dynamics Corp. ( GD) have all enjoyed gains since the president’s Aug. 21 speech about Afghanistan.
Stock market experts say the rise in defense industry investments should roll on in the coming weeks and months.
“I expect this trend to continue with strong performance especially in companies like Lockheed Martin, Northrup Grumman and Boeing, all of which have secured major recent defense contracts,” says Jennifer Kelber, assistant professor in the department of economics and business at St. Anselm College in New Hampshire. “President Trump’s new strategy in Afghanistan, combined with his proposed 10 percent increase in the defense budget as well as the escalating threat in North Korea, indicate that this sector will be strong for some time to come.”
Some of the defense sector growth was baked in when Trump, a strong backer of the U.S. military, took office. But recent events, especially the Afghan push, reinforces the view that the defense industry has a big ally in the White House.
“President Trump made a commitment to increasing U.S. defense spending, and a massive expansion in the U.S. Navy from 275 ships to 350 ships, during his election which has helped the defense sector gain throughout 2017,” says Ed Anderson, chief analyst at FxPro in London.
Anderson says the aerospace and defense industry will have been bolstered with Trump’s new Afghan policy, but there are some caveats. “With little detail of the new strategy and his comment that there will be no blank check, this may not result in an immediate lift to the defense industry,” he says. “That said, with the new Afghan strategy and the continuing rhetoric between Trump and North Korea, many expect the incumbents’ share values to continue higher.”
[See: 9 Ways to Invest Under President Donald Trump.]
Anderson says companies that focus on cybersecurity are likely to see an even greater increase in value. Cybersecurity plays include Booz Allen Hamilton Holding Corp. ( BAH), Honeywell International ( HON), International Business Machines Corp. ( IBM) and Raytheon Co. ( RTN).
The North Korea situation has also helped boost defense industry stocks.
“While pundits were talking about a peace dividend around the time of the ending of the Cold War, what we are currently witnessing is the potentiality of dramatically increased defense spending over an extended period of time,” says Robert Johnson, president and CEO of the American College of Financial Services, in Bryn Mawr, Pennsylvania.
Johnson advises investors looking for leverage in the defense industry to focus on specific funds and ETFs. “The iShares US Aerospace and Defense ETF ( ITA) is an ideal candidate,” he says. “The fund holds positions in Boeing, United Technologies ( UTX), Lockheed Martin, General Dynamics and Raytheon.” Boeing (11 percent) is the top-weighed equity of the 39 stocks held by ITA, which has an expense ratio of 0.44 percent, or $44 per $10,000 invested annually.
Johnson backs up the notion that much of the impact of a Trump presidency is already impounded in the prices of defense stocks. “The ITA is up an astounding 28 percent over the past year,” he says. “My trepidation with assuming a bullish future for aerospace and defense stocks is simply that there is so much uncertainty regarding the trajectory of President Trump’s policies. His policies would seem to strongly favor the aerospace and defense industry, but the only certainty with Trump seems to be uncertainty.”
Defense contractors may be in a position to realize more revenue, but Trump may put pressure on these firms that would lower their profit margins, Johnson says. “The sector currently seems fairly valued, as the price-earnigns ratio on the ITA ETF is roughly 23.5 times earnings, which is approximately the P/E on the S&P 500,” he adds.
Sam Bocetta, a former defense industry contractor and editor at Gun News Daily in Long Beach, California, says the valuation of the defense industry companies will go up significantly because of the continued U.S. involvement in Afghanistan, especially General Dynamics, Raytheon, BAE Systems, Boeing and Lockheed Martin.
“Placing troops on foreign soil is extremely costly to the American taxpayer, costing in excess of $1 million each year to keep each soldier armed, fed and alive,” he says. “The five companies specifically develop many of the ground weaponry, ammunition and vehicles, both manned and unmanned, that will be used by the new troops in Afghanistan. As such, we can expect that with somewhere between 2,000 to 10,000 more troops on the ground, the production of smart weaponry will also ramp up significantly.”
[See: 10 ETFs to Buy for Aggressive Growth.]
Right now, Uncle Sam seems to be ratcheting up his military presence abroad, and defense industry stocks are booming as a result. With rifles at the ready, investors may want to begin a march of their own into military-themed stocks and funds.
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North Korea Standoff: How to Invest in Defense Stocks originally appeared on usnews.com
