Please ensure Javascript is enabled for purposes of website accessibility

Military Cuts: Aerospace and Defense Stocks Being Dumped by the Smart Money

By Kapit all – Updated Apr 6, 2017 at 11:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

So how will aerospace and defense stocks react to the expected budget cuts?

In the decade since 9/11, the Pentagon has kept its wallet wide open for defense expenditures, according to Defense Secretary Robert Gates, perpetuating a "culture of endless money, where cost was rarely a consideration." Gates' proposed solution? A round of budget cuts over the next five years to slash military spending by $78 billion, in addition to the $100 billion in internal savings recently announced. These reductions will be the largest the nation has seen in 10 years.

2010's defense budget topped $700 billion, making it the single largest component of the federal government's discretionary budget. So what's been deemed expendable? Not funding for the wars in Iraq and Afghanistan, which, despite a $1 trillion price tag, won't be cut. But pricey military hardware, including a $14 billion amphibious Expeditionary Fighting Vehicle (EFV), is. Also falling into the non-essential category, an army surface-to-air missile program, with Gates skeptical as to their relevance as modern warfare continues to evolve. Gates also aims to slash administrative and personnel costs, seeking more efficient organizational structures.

To get there, the expanding defense budget would have to slow from the 3% mark, a projected $553 billion in 2012. From there, growth would incrementally slow and flatten out in 2015.

Of course, don't expect the cuts to go down without a good Congressional fight -- there's a strong and vocal contingency more than likely to oppose the proposed changes, particularly to weapons programs.

So how will aerospace/defense stocks react to the expected budget cuts? For ideas, we tracked down institutional investors that have been selling defense stocks over the last three months.

Institutional investors typically do extensive research in the stocks they're looking to buy, so it's not a bad idea to pay attention to their trades -- after all, they don't call it the smart money for nothing. But are they being too pessimistic on these names? You be the judge. (Click here to access free, interactive tools to analyze these ideas.)

Company

Shares Held by Institutional Investors Today

Shares Held by Institutional Investors 3 Months Ago

% Change in Institutional Ownership

Curtiss-Wright (NYSE: CW)

32,304,995

33,738,650

-4.25%

Kaman Corporation (NYSE: KAMN)

25,659,894

25,819,948

-0.62%

HEICO (NYSE: HEI)

10,631,410

10,695,801

-0.60%

GenCorp (NYSE: GY)

53,166,137

53,459,397

-0.55%

Lockheed Martin (NYSE: LMT)

317,437,439

318,383,011

-0.30%

Institutional data sourced from Reuters. The list has been sorted by the change in institutional ownership over the last three months.

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. Note: The numbers on top of items represent the forward P/E ratio, if available.


Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

The Fool owns shares of Lockheed Martin. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Curtiss-Wright Corporation Stock Quote
Curtiss-Wright Corporation
CW
$138.70 (-3.53%) $-5.08
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$413.07 (-2.13%) $-9.01
Aerojet Rocketdyne Holdings, Inc. Stock Quote
Aerojet Rocketdyne Holdings, Inc.
AJRD
$41.20 (-2.60%) $-1.10
HEICO Corporation Stock Quote
HEICO Corporation
HEI
$145.66 (-2.11%) $-3.14

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.