Six months on from 11 September, US defence stocks are selectively continuing to hit new highs. Inve...
Six months on from 11 September, US defence stocks are selectively continuing to hit new highs. Investors are showing renewed interest in the sector which, after making significant gains, has seen some valuations come back, according to Gil Knight, manager of the Govett US Opportunities fund.
The sector is underpinned by a huge rise in the US defence budget, set to represent a spend of about £105bn over the next three to four years, which Knight says will be good for US defence companies.
He notes that Alliant Tech Systems had a big jump in its share price after 11 September, hitting $92 between September and October. In February, the price dropped back down to $72 but, as at 11 March 2002, it had shot back to $98.
Knight says: 'There has been an important change in the US media. It is getting more behind the government, which has not always been the case in wars like this. This helps the defence firms as, if everyone is behind the war effort, no one will stand up against the increased spending on these firms.'
Knight says a grouping of five giant defence companies in the US should continue to do well. These are led by Boeing, which, as well as being involved in commercial jet aircraft, researches, develops, produces and supplies information for space and defence systems. The other giants of the sector are Raytheon, which makes Tomahawk missiles, Lockheed Martin, manufacturer of the stealth bomber, Northrop Grumman and General Dynamics.
Simon Melluish, head of US equities at Gartmore, says that while defence stocks did come off a little last month, he is still keen on the sector because of the likely secular up-trend after the defence budget and because valuations in the sector are still reasonable. He says there is also consolidation in the sector that allows for cost-cutting, which could lead to better than expected earnings growth.
Melluish says: 'We are overweight in US defence stocks and will remain so for the foreseeable future as there are still upsides in firms' price targets. The sector is likely to surprise on the upside, which fits our philosophy of seeking unexpected growth.'
When markets closed on 10 September and re-opened on 17 September, Melluish says, defence companies were the only stocks that stepped up, with all others stepping down.
He points out that Northrop Grumman's share price rose from $81 when the markets closed on 10 September to $93 when they re-opened on 17 September. Similarly, General Dynamics closed at $75 and re-opened at $83, while Lockheed Martin went from $38.4 to $44.2.
Melluish says these stocks had a good run until October, on a relative basis versus the S&P 500. Over the past three months, he adds, Lockheed has outperformed the index by 21%, and by 61% over 12 months. Northrop has outperformed by 11% over three months to 11 March 2002 and by 19% over 12 months to the same date, while United Technologies outperformed by 23% over three months but has been neutral over 12 months as a result of its aircraft business.
Overall, the aerospace and defence sector is the sixth highest returning sector in the S&P 500 over the year to 12 March 2002, returning, in US dollar terms, 19.87%, compared with the index return of 1.52%.
US defence stocks are still hitting new highs.
There are still upsides in firms price targets.
Valuations in the sector are still reasonable.
Media attention could harm investments.
Some stocks experiencing volatility.
Valuations gaining ground.
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