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Why Northrop Grumman, Lockheed Martin, and L3Harris Shares Popped More Than 10% Today

By Rich Smith - Mar 17, 2020 at 6:44PM

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Defense stocks got aggressive on Tuesday.

What happened

Well, that was exciting. After witnessing back-to-back days of unmitigated selling on Wall Street, stocks turned around on Tuesday and raced back to the north, with the Dow ending 5.2% higher and the S&P 500 up 6%.

Defense contractors Northrop Grumman (NOC 0.21%), L3Harris (LHX 0.19%), and Lockheed Martin (LMT -0.28%) joined in the fun, closing the day up 13%, 11.5%, and 10.8%, respectively.

Military silhouettes of tanks, warships, and military aircraft

Image source: Getty Images.

So what

Why did they move higher? In the case of one, the answer seems apparent. Monday, Lockheed announced that its CEO, Marillyn Hewson, is stepping down to be replaced by board member James D. Taiclet, who will be leaving American Tower (AMT -0.37%).

Taiclet, a veteran of industrial giants and sometimes-defense contractors Honeywell and United Technologies, is also a veteran, period, having served in the U.S. Air Force before entering the business world. With Hewson's retirement already anticipated, investors appear to be reacting positively to the choice of her successor.

As for the even bigger stock moves by Northrop Grumman and L3Harris, there doesn't appear to be any catalyst -- just a general snapback in sentiment after some pretty aggressive stock-selling on Monday and during last week.

Now what

Will that sentiment continue? Will these stocks continue to rise?

Perhaps they will. Even in the age of the coronavirus, military defense isn't really an optional activity. (Just on Monday, it was reported that the U.S. Department of Health and Human Services was subjected to a cyberattack in the middle of the coronavirus crisis -- an attack linking real and virtual viruses!)

Because the military will always need weapons, there will always be a need for defense contractors to manufacture and sell them, and that may explain some of the investor optimism we saw on display today.

That being said, even after the vicious bear market we've endured these past few weeks, Lockheed Martin stock still sells for 1.5 times trailing sales, which is 50% above the long-term average valuation for defense stocks. Northrop Grumman stock costs nearly 1.6 times annual sales, and L3Harris sells for a whopping 2 times annual sales. Altogether, it seems to me that all three of these stocks remain significantly overvalued.

Call me a pessimist, but I suspect it may take a full-blown recession to finally bring them back down to fair value.

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Stocks Mentioned

Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
$419.54 (-0.28%) $-1.17
L3Harris Technologies, Inc. Stock Quote
L3Harris Technologies, Inc.
$236.26 (0.19%) $0.44
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
$465.66 (0.21%) $0.99
American Tower Corporation Stock Quote
American Tower Corporation
$251.99 (-0.37%) $0.94

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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