Pentagon Budget Cuts: Hedge Funds Start Dumping Defense Stocks

The Pentagon's budget is facing steep cuts as a result of the recently passed debt-ceiling deal. That means fewer contracts for all things military, including top of the line fighter jets, nuclear submarines, and attack helicopters. Blackhawk down. Blackhawk down.

According to the White House, the deal "includes Savings of $350 billion from the Base Defense Budget -- the First Defense Cut Since the 1990s: The deal puts us on track to cut $350 billion from the defense budget over 10 years."

Moreover, because the specifics of $1.2 trillion worth of "deficit reduction" will likely be decided after the 2012 election, the defense budget could be facing more cuts.

"[An Automatic] Sequester Would Provide a Strong Incentive for Both Sides to Come to the Table: If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education. That outcome would be unacceptable to many Republicans and Democrats alike -- creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for our economy," according to the White House.

Alexander Eichler of The Huffington Post suggests that private industry could already be feeling the effects of the budget cuts:

"Northrop Grumman and Lockheed Martin, two of the world's largest defense contractors, both saw their profits decline in the second quarter of 2011. Northrop CEO Wesley Bush has reportedly cited the budget debate in Washington as one factor depressing his company's sales," Eichler writes.

Hedge fund managers are already turning bearish on a number of Aerospace/Defense firms (listed below). Do you also think these companies are in the line of fire in the upcoming salvo of spending cuts?

List sorted by net shares sold by institutional investors as a percentage of the share float. (Click here to access free, interactive tools to analyze these ideas.)

1. GenCorp (NYSE: GY  ) : Market cap of $331.66M. During the current quarter, institutional investors have sold 3.6M shares (net), which represents 7.26% of the 49.59M share float. It develops and manufactures propulsion systems for defense and space applications, armament systems for precision tactical weapon systems and munitions applications. Its major market segments include space launch and in-space propulsion systems, missile defense, tactical missile systems, and force projection and protection systems. Customers of its aerospace and defense segment include the United States Government, the Department of Defense (DoD), and the National Aeronautics and Space Administration (NASA).

2. L-3 Communications Holdings (NYSE: LLL  ) : Market cap of $8.13B. During the current quarter, institutional investors have sold 5.0M shares (net), which represents 4.73% of the 105.63M share float. It is a prime contractor in Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) systems, aircraft modernization and maintenance, and government services. It is also a provider of a range of electronic systems used on military and commercial platforms. Its customers include the United States Department of Defense (DoD) and its prime contractors, United States Government intelligence agencies, the United States Department of Homeland Security (DHS), United States Department of State (DoS), United States Department of Justice (DoJ), allied foreign governments, domestic and foreign commercial customers, and select other United States federal, state and local government agencies.

3. Goodrich (NYSE: GR  ) : Market cap of $11.77B. During the current quarter, institutional investors have sold 4.9M shares (net), which represents 3.94% of the 124.43M share float. Its products include actuation systems, landing gear, aircraft wheels and brakes, nacelles, interiors, engine control systems, intelligence surveillance and reconnaissance systems, sensor systems and power systems.

4. Alliant Techsystems (NYSE: ATK  ) : Market cap of $2.14B. During the current quarter, institutional investors have sold 890.1K shares (net), which represents 2.67% of the 33.37M share float. It is a producer of military small-caliber ammunition for use in soldier-carried weapons, such as automatic and semi-automatic rifles, and machine guns. It is also one of the producers of medium-caliber ammunition used by crew-served weapons on armored vehicles and aircraft. It is a producer of military large-caliber ammunition used by tanks. In addition, it is a producer of ammunition for the sport enthusiast and law enforcement markets. It is a manufacturer of solid rocket motors, supporting tactical, strategic, missile defense, and space launch applications.

5. General Dynamics (NYSE: GD  ) : Market cap of $25.11B. During the current quarter, institutional investors have sold 5.1M shares (net), which represents 1.66% of the 307.22M share float. It offers a portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; military and commercial shipbuilding, and communications and information technology.

6. Raytheon (NYSE: RTN  ) : Market cap of $15.67B. During the current quarter, institutional investors have sold 3.1M shares (net), which represents .88% of the 351.58M share float. It is a technology company and specializes in defense, homeland security and other government markets. It provides electronics, mission systems integration and other capabilities in the areas of sensing, effects and command, control, communications and intelligence systems (C3I), as well as a range of mission support services. It serves both domestic and international customers, principally as a prime contractor on a portfolio of defense and related programs for government customers.

7. Lockheed Martin (NYSE: LMT  ) : Market cap of $24.99B. During the current quarter, institutional investors have sold 2.2M shares (net), which represents .82% of the 267.56M share float. It is a global security company engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems and products. It also provides a range of management, engineering, technical, scientific, logistic, and information services. It serves both domestic and international customers with products and services that have defense, civil, and commercial applications, with its principal customers being agencies of the United States Government.

8. Force Protection (Nasdaq: FRPT  ) : Market cap of $319.55M. During the current quarter, institutional investors have sold 482.2K shares (net), which represents .70% of the 68.85M share float. It provides survivability solutions to support the armed forces of the United States and its allies. It designs, manufactures, tests, delivers and supports its blast- and ballistic-protected products. Its specialty vehicles are designed to protect their occupants from landmines, hostile fire, and improvised explosive devices (IEDs). It is a provider of the United States military's Mine Resistant Ambush Protected (MRAP) vehicle program, and have sold and delivered over 3,000 vehicles under this program. It provides its Cougar and Buffalo mine-protected vehicles to several foreign customers, including the United Kingdom Ministry of Defence.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Andrew Dominguez does not own any of the shares mentioned above. Data sourced from Finviz.

The Motley Fool owns shares of Raytheon, Lockheed Martin, L-3 Communications Holdings, and General Dynamics. Motley Fool newsletter services have recommended buying shares of L-3 Communications Holdings. 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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  • Report this Comment On August 03, 2011, at 3:18 PM, dstb wrote:

    Much of the defense cuts will likely come from retirement and healthcare adjustments and personnel reduction. Reducing weapons systems and platforms much further along with less investment in modernization would be suicidal with the threat level in the world today. Too many people think freedom is for free and the ability to project power is unnecessary.

  • Report this Comment On August 04, 2011, at 12:57 PM, Mikey925 wrote:

    The author of this article points out how hedge funds are dumping these names, and specifically highlights how L-3 Communications has seen 5 million shares sold by funds in the current quarter.

    What the author fails to highlight is the fact that San Diego fund manager Ralph Whitworth of Relational Investors has purchased 6.2 million shares of L-3 in the current quarter, per the 13D that they filed last month.

    The Company will be spinning off their $2 Billion dollar Govt. Services division in 2012 in order to increase overall operating margins at the Company and focus more on Intelligence, Surveillance, and Reconnaisance.

    L-3 (LLL) is not your typical Prime Defense Contractor. The author doesn't seem to understand this. Their portfolio is way more diverse than the likes of LMT and NOC and GD. They are extremely proficient in ISR.

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