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Saying defense stocks are racing the market to the bottom implies real, sporting competition of some sort, but that's not the case here. Fueled by budget cut fears, defense stocks have left the market far behind. But even as the federal government goes short on defense, there's good reason for you to consider going long.
When austerity attacks
Europe has been in the grip of austerity fever for some time, arriving only more recently in the U.S. -- with a vengeance. As evidenced by the combative debt-ceiling debate, fiscal concerns have overtaken all others in Washington. The initial deal calls for defense to take a $350 billion hit, but another round of cuts is in the offing.
It's anyone's guess how hard defense might be hit in that second round, but the beating will likely continue to one degree or another. No economist worth his or her salt thinks real debt reduction and deficit control can occur without defense taking it further on the chin.
Is that light at the end of the tunnel, or a train?
Acknowledging the situation doesn't look too promising right now, some top defense company executives insist their businesses will come out of the budget cuts just fine thanks to, among other advantages, the potential for international growth. Jim Albaugh, head of Boeing (NYSE: BA ) Commercial Airplanes and a former head of its defense unit, says the company aims to generate 25% of its defense sales abroad within 10 years.
The market slide may already be priced in, Fools
Some analysts believe budget cut fears are depressing a sector that was already discounted for future uncertainty. Many defense stocks, like Boeing, Lockheed Martin (NYSE: LMT ) , Rockwell Collins (NYSE: COL ) , Spirit AeroSystems (NYSE: SPR ) , Alliant Techsystems (NYSE: ATK ) , and Huntington Ingalls Industries (NYSE: HII ) are nearing their 52-week lows. And price-to-earnings ratios are all quite attractive, with none above the mid-teens. Add to this, the dividend yields on some defense companies are now approaching or have even surpassed 4%, including: Raytheon (4.2%), Northrop Grumman (NYSE: NOC ) (3.8%), and Lockheed Martin (4.1%).
Finally, also consider that, in this general defense stock slide, defense companies are getting lumped together. But some, like Boeing, have less exposure to the looming cuts because they're diversified beyond defense. Similarly, if you're truly fearful of defense, avoid pure plays like Lockheed.
Right now, there's limited downside to these stocks. That, plus healthy dividends, makes a strong case for adding some of these down-but-not-out defense stocks to your portfolio.
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