With the war in Iran entering its fourth day, we remain unsure about how long it will last and what the world might look like once the smoke clears.
President Donald Trump has suggested it might last four to five weeks, but he was also clear that it could go on “far longer.”
Given that Iran has already effectively closed the Straits of Hormuz – the narrow passage that around 20% of all oil and gas pass through – energy prices could be in for a wild ride.
I won’t speculate as to what happens on the battlefield or in peace negotiations.
I build trading systems, not war simulators.
But I can tell you that the uncertainty is making investors nervous.
Not only were stocks down sharply this morning as I sat down to write this, but the CBOE Volatility Index (VIX) – a measure of options volatility popularly known as the “fear index” – was up over 30%.
Still, there’s one market sector looking strong this week amid today’s heightened turbulence: defense.
Defense stocks were already having a strong run before bombs started dropping, and the events of the past few days certainly haven’t hurt that uptrend.
The iShares U.S. Aerospace & Defense ETF (ITA) is up almost 17% this year, with about 3% of that coming yesterday.
Normally, we do a “sector X-ray” of one of the 11 major sectors that make up the S&P 500 Index.
Given the current situation in Iran, we’re going to switch things up and do a targeted X-ray of the S&P 500’s defense and aerospace stocks.
Let’s dig in!
A Peek Under the Hood
There are a total of 13 stocks in the defense and aerospace subsector… including nine that rate as “Bullish” on my Green Zone Power Ratings system. One rates as “Neutral,” and only three rate as “Bearish.”
Defense is one of the most overwhelmingly bullish sectors I’ve seen in months. Keep in mind, virtually all of the data used to compile my Green Zone Power Ratings came before the onset of the war.
The sector was already looking great before the U.S. and Israel started their bombing campaign. Now, with the U.S. and its allies needing to replenish spent munitions, the runway looks even longer.
Let’s dig deeper to see which factors contribute the most to the “Bullish” ratings.
Where Do Defense Stocks Pick Up Points?
One thing immediately jumps off the page.
The bullishness in the sector isn’t due to just one or two factors.
It’s remarkably balanced, with growth, quality, volatility and momentum each having nine or more stocks with “Bullish” factor ratings.
If there were a weak spot, it would be the value factor. Only two defense stocks rate as “Bullish” on their value factor.
That’s not surprising.
I wouldn’t expect to find many high-quality growth stocks trading at a discount.
An underappreciated aspect of this industry is its low volatility.
While war is unpredictable, defense spending is anything but.
As surely as the sun will rise in the east tomorrow, Congress will vote to authorize higher defense spending year after year. No politician, democrat or republican, wants to be seen as “anti-military.”
This predictability tends to smooth the earnings stream. Even if we had a deep recession starting tomorrow, defense companies wouldn’t be all that affected.
Defense / Aerospace Stocks in the S&P 500
Let’s take a look at the 13 defense and aerospace stocks in the S&P 500.
Most of these companies will be familiar names.
General Dynamics (GD), Northrop Grumman (NOC), Lockheed Martin (LMT) and RTX Corp (RTX) – formerly Raytheon – have been defense mainstays for decades.
Lockheed and RTX are particularly interesting today because of their missile production and missile defense systems.
Lockheed’s Terminal High Altitude Area Defense (THAAD) interceptors are in particularly high demand, and stockpiles are reportedly running low.
The 12-Day War between Israel and Iran depleted approximately 25% of existing THAAD stockpiles, and current hostilities are burning through even more.
As a result, Textron (TXT) has been popping up on my screens over the past few months – which I first mentioned back in January.
The company is best known for its Bell helicopters, Cessna and Beechcraft aircraft, as well as its aerial drones.
Along with Leidos Holdings (LDOS), it’s one of only two stocks in the sector that rates as “Bullish” across all factors.
To good profits,
Adam O’Dell
Editor, What My System Says Today
