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Stocks to Watch if the Government Shuts Down

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If you came anywhere near a news outlet this week, you probably heard at least some mention of the looming shutdown of the federal government. If Congress cannot pass a budget resolution by the end of the day today, the government will stop operation of most non-essential duties, including the national parks, tax refund services, and passport application processing to name only a few. A similar situation last occurred during 1995-96 when the federal government placed many of the same non-essential workers on furlough for a total of 21 days. If such a situation occurs tonight, it will put 800,000 workers at least temporarily out of work. Considering that a shutdown -- especially one that lasts for an extended number of days -- will undoubtedly affect the private sector, I wanted to quickly highlight a few stocks to monitor as this potential crisis unfolds.

The defense industry, more than any other sector, relies on government spending to generate the lion's share of their revenues. As such, a shutdown will cause large scale disruptions for contractors of all sizes. There won't be any new money coming in, and previously billed invoices will remain unpaid. Furthermore, many of the employees of these companies will be forced to take vacation until policy-makers reach some kind of compromise (hurry up already!).

Of course, the federal government will eventually work out its issues and return to business as usual. For investors, this sets the stage for an interesting but temporary buying opportunity. Since a government shutdown will also cause these businesses to miss out on near-term revenues, it could materially affect contractors' operating results, and the resulting uncertainty could weigh on these stocks. In looking at this from a longer-term perspective though, its overall effects on business results should prove negligible. The last government shutdown lasted for 21 days. While that certainly seems like an unappealing prospect for many workers involved, it should only marginally impact the companies' operating results, if it even lasts that long. In particular, watch for potential unjustified price declines in many of the major defense contractors, including:


Price/LTM Diluted EPS Before Extra Items

Lockheed Martin (NYSE: LMT  )

11.4 times

Boeing (NYSE: BA  )

16.7 times

Northrop Grumman (NYSE: NOC  )

9.2 times

General Dynamics (NYSE: GD  )

11.0 times

Raytheon (NYSE: RTN  )

10.9 times

United Technologies (NYSE: UTX  )

18.0 times

Alliant Techsystems (NYSE: ATK  )

8.0 times

As I argued weeks ago, I think the defense industry already looks cheap. However, the temporary bout of negativity from a government closure could further depress many of these stocks.

Intelligent investors know they need to go against the crowd to buy favorably priced shares. However, only time will tell if this opportunity will even occur. Congress could actually get its act together and avoid this crisis entirely. Given recent posturing from Washington, I won't hold my breath. But if things do work out, and this opportunity proves the stuff of dreams, that's exactly the kind of missed opportunity I'll gladly tolerate.

To follow all the latest news on your favorite defense stocks, click here to add them to My Watchlist.

Andrew Tonner owns no shares of the companies mentioned in this article. The Fool owns shares of General Dynamics, Lockheed Martin, Northrop Grumman, and Raytheon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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