Defensive investors eye Lockheed Martin

U.S. investors are dashing to cash - and defence sector

Dash to cash

U.S. investors are dashing to cash whilst stock markets are temporarily a mess. Bank of America Merrill Lynch’s weekly fund manager survey showed 4.8% of the record equity outflow last week went into cash and cash-like securities, the most amongst assets BofA monitors. That followed a 4.4% rise in allocations to ‘cash’ in January. That says investors want to keep their powder dry. It also says investors realise tax cuts are expected to require more debt issuance, whilst rising wages and unstinting economic growth will keep the monetary tightening path steep. All that will keep Treasurys out of favour.

Stop gap defence

Under such circumstances, we expect short-term defensive equity allocations to come into view and the ‘value’ side of the market to attract most interest. Our quick and dirty quantitative price analysis screened the S&P 500 Value Index. We sought stocks with enhanced momentum—those with a 21-day moving average that had recently crossed over a longer-term moving average. We also filtered for equities with outstanding volume but whose prices remained relatively static.

Defensive

Unsurprisingly, narrowing our horizon presented only a handful of candidates. The theme was defensive in more ways than one. Aerospace & defence giants like Boeing and Lockheed Martin are in the spotlight right now as North Korea increases missile tests and defence budgets rise in the States, the Middle East and Asia. Lockheed is the timeliest pick in the sector, according to our screen.

Pipeline

The $95bn group has been making the headlines this week at the Singapore Air Show. Investors are hopeful that Lockheed’s deal pipeline is cranking up after a $524m missile contract was announced on Thursday, and a top executive said an order for one hundred F-16s could be inked “soon”. Singapore was also “seriously evaluating” a purchase of F-35s, the exec said. Last month, the Pentagon awarded the group a $150m contract for a laser weapon system, noting the deal could eventually grow to $942m. Lockheed's quarterly revenues, announced last month, rose 11.8%, beating forecasts. It also issued higher profit guidance than expected. On the negative side, the group's stock has been most sensitive of late to the impact of its Black Hawk helicopter programme--its single most profitable business--drawing to a close. Lockheed expects Black Hawk revenues to be gradually replaced by a new CH-53K helicopter programme for the U.S. Marines. The stock rose almost 40% over a year before the market correction, during which it shed 10%. The group will pay an interim dollar dividend on 28th February. 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.