Defense suppliers like General Dyanmics (GD) and Lockheed Martin (LMT) are some of the market's most undesirable stocks . Sales to these companies jumped following the terrorist attacks of Sept 11, 2011 and have escalated because of operations in Iraq and Afganistan. As the financial crisis of 2008 falls farther back into the recesses of our minds, the American public has shifted their attention to the latest headlines, including this country's soaring per capita debt, growing health care costs and unfunded liabilities.
A natural consequence of this increased attention is talk of national budget reductions. With 20% of federal spending in 2010 going towards defense, there is reason for investors to speculate about affected companies. We think the concerns could present opportunities.
VALUATION AND EXPOSURE
It's easy to fall in love with a macro thesis. They are easy to recite and can be constructed with minimal effort. For example, 'US budget cuts are inevitable, so sell defense names." This is a reasonable statement, but valuations matter, as do each company's exposure to defense spending cuts. Below is a chart with notable companies with significant amounts of revenue attributed to government spending.
|Company||Market Cap||Forward P/E||Dividend Yield||Revenues from Government|
Data Source: Company SEC 10-K filings.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.