Will Mattis Have An Impact On Stocks As Defense Secretary?
Zacks Investment Research | Dec 02, 2016 04:14AM ET
On Dec 1, President-elect Donald Trump announced that retired marine general James Mattis was his choice for Secretary of Defense. Speaking at a rally in Cincinnati, OH, Trump said he was “the closest thing we have to General George Patton.” Mattis will require a special waiver from Congress since he has yet to complete the seven years out of service necessary to be eligible for the position.
However, as a candidate who enjoys wide ranging support both within the military and on Capitol Hill, Mattis is likely to be confirmed largely unopposed. Known for his hawkish views, Mattis will have a strong impact on U.S. defense policy. This is why it is necessary to examine whether his presence in the Trump administration will have a significant impact on defense stocks which have been on an upswing ever since election results were announced.
“Mad Dog” and his Methods
During his final years in service, Mattis was leading United States Central Command. However, his stint as head of military operations in the Middle East and South East Asia came to an end after the Obama administration thought that he had adopted a hardline approach on Iran. Mattis believes that Iran is the primary threat to lasting peace in the Middle East, in keeping with Trump’s views. Additionally, his criticism of the last administration’s methods while pursing the conflict in Iraq and Syria has made him a natural choice for Trump.
However, Mattis is at variance with the President elect on several issues. For instance, he believes that Trump’s overtures toward Russia are unnecessary if not ill advised. Despite his tough stance on Iran, he believes that upholding the nuclear agreement would benefit the U.S. He has also opposed Trump’s position on torture. But for those who feel that Mattis will help moderate Trump’s views, he still has enough points of agreement with the new administration to help facilitate his integration.
Trump’s Impact on Defense Companies
When considering the importance of Mattis’ selection it becomes necessary to note that like Trump, he has little administrative experience. Nor does the former general have any exposure to public life. A former senior military officer has said that he was a good choice but would require a deputy with keen knowledge of budget and procurement procedures.
Additionally, Trump’s proposed defense spending program is at variance with his foreign policy views. The president elect envisions recalling U.S. troops home and rich allies sharing a larger portion of the burden of expenditure.
However, when it comes to the armed forces, Trump is likely to step up expenditure by nearly $60 billion every year. The president elect would like to enlarge the size of both the army and the marines substantially which also requires a concurrent increase in spending on arms and other supplies. He also proposes that the air force have “at least 1,200 fighter aircraft,” a hundred more than its current strength. Additionally, Trump calls for a navy with 350 ships which is near the far end of the size proposed by the National Defense Panel.
Get The News You Want
Most, if not all off these proposals are likely to meet with Mattis’ approval. It is only on matters of deployment and strategy that he is likely to temper the president’s influence. It seems that good times are likely to last for defense stocks in an era where rearmament could be the watchword.
Defense Stocks to Watch
Since election results were announced on Nov 8, the iShares US Aerospace & Defense (ITA) has gained 10.5%, indicating the rising popularity of defense stocks. Both Clinton and Trump had urged in favor of substantial increases to the defense budget. This is probably why ITA has risen 21.7% year-to-date. Below we examine some of the key stocks which investors are likely to focus on in such a scenario.
Performance of Key Defense Stocks Vs. Sector (Since Nov 8, 2016)
Northrop Grumman Corporation (NYSE:NOC) provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas. The company’s share price has outperformed the Zacks Categorized Aerospace/Defense industry price over the last one year on the back of its systematic and consistent investment in research and development.
Northrop Grumman has expected earnings growth of 27.5% for the current year. The stock returned 8.4% between Nov 8, 2016 and Dec 1, 2016, underperforming the Zacks Aerospace/Defense industry, which has returned 9.7% over the same period. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Lockheed Martin Corp. (NYSE:LMT) is the largest defense contractor in the world. Its third-quarter 2016 earnings as well as revenues surpassed the Zacks Consensus Estimate. Meanwhile, the 10% hike in quarterly dividend raises investors’ optimism.
Lockheed Martin has a Zacks Rank #2 (Buy). The company has expected earnings growth of 5.6% for the current year. The stock returned 11.4% between Nov 8, 2016 and Dec 1, 2016, outperforming the Zacks Aerospace/Defense industry, which has returned 9.7% over the same period.
General Dynamics Corp. (NYSE:GD) is one of the only two contractors in the world equipped to build nuclear-powered submarines. Its revenues are derived from a broad portfolio of products and services that help to keep the overall growth momentum steady. The company's share price has outperformed the Zacks Aerospace/Defense industry price in the last one year
General Dynamics has a Zacks Rank #3 (Hold). The company has expected earnings growth of 7.8% for the current year. The stock returned 14.7% between Nov 8, 2016 and Dec 1, 2016, outperforming the Zacks Aerospace/Defense industry, which has returned 9.7% over the same period.
Huntington Ingalls Industries, Inc. (NYSE:HII) designs, builds and maintains nuclear-powered ships such as aircraft carriers and submarines, as well as non-nuclear ships. Being the nation’s largest military shipbuilder, Huntington Ingalls continues to boast stable financials and regular cash returns to shareholders.
Huntington Ingalls has a Zacks Rank #3 (Hold). The company has expected earnings growth of 19.6% for the current year. Its earnings estimate for the current year has improved by 0.2% over the last 30 days. The stock returned 19.2% between Nov 8, 2016 and Dec 1, 2016, outperforming the Zacks Aerospace/Defense industry, which has returned 9.7% over the same period.
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