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Why General Dynamics Lost 15% in December

By Lou Whiteman - Updated Apr 11, 2019 at 11:32PM

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A military powerhouse ran into political headwinds.

What happened

Shares of General Dynamics ( GD 2.03% ) plunged 15% in December, according to data provided by S&P Global Market Intelligence, capping a difficult -- down 22% -- year for the defense contractor. It was a rough month for the markets in general, but concerns about the federal budget made December particularly painful for GD holders.

So what

General Dynamics and other defense titans had been riding high, with General Dynamics shares up more than 120% over a five-year period, as investors celebrated single-party control in Washington and a two-year budget deal that followed. We warned in October that the U.S. midterms could rain on that parade, and in December, investors saw firsthand how political dynamics can impact stocks like General Dynamics.

Investors were rattled by the surprise mid-month resignation of Defense Secretary James Mattis. And a partial government shutdown that began late in the month after the White House and Congress were unable to agree on a spending plan has led to doubts that the two sides will be able to come together and forge a fiscal 2020 compromise.

General Dynamics Griffin II light tank prototype.

General Dynamics Griffin II light tank prototype in action. Image source: General Dynamics.

There is real danger to the sector if Washington lawmakers can't agree to a long-term spending deal. Absent a budget compromise, spending caps will return for 2020, and the Pentagon could see nearly $100 billion in annual cuts, a scenario that would seriously impact near-term growth for General Dynamics and other contractors.

Check out the latest General Dynamics earnings call transcript.

Now what

Even if this temporary partial government shutdown is eventually resolved, there is little to suggest that the fiscal 2020 budget will come easy. With that in mind, investors are likely in for a turbulent few months, if not longer, as lawmakers struggle to find common ground on spending levels.

But for the long-term investor, the pullback in General Dynamics shares looks like a buying opportunity. The Pentagon is in the early stages of a refresh aimed at focusing more on a potential major-power conflict and less on fighting insurgencies. That means new equipment, and General Dynamics is well positioned to win lucrative work on the U.S. Army's forthcoming next-generation combat vehicle and a planned light tank.

A lot has happened in the weeks since I named General Dynamics my top defense stock to buy in 2019. Though the near term is murky, this remains a company to own for the long haul.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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