2 Explosive Stocks To Benefit From A Military Conflict

Includes: LMT, NOC
by: Elliott Auckland

The Iranian nuclear situation is heating up quickly with recent comments by Israeli Prime Minister Netanyahu hinting that a military strike is coming closer.

"Israel has waited for diplomacy to work; we've waited for sanctions to work. None of us can afford to wait much longer..... As prime minister of Israel I will never let my people live in the shadow of annihilation" - Netanyahu

It seems now that there are two outcomes:

1. Iran does not attempt to develop nuclear weapons.
2. Iran continues along its current path and there is a military strike.

The first scenario is clearly the most desirable for global peace. But how might this come about? Well, it is possible that the recent Iranian parliamentary elections change the nuclear policy. But given the comprehensive support across the board, this seems unlikely out of the blue. The only way that this will happen it seems is if the economic sanctions work. They are undoubtedly having an effect on the Iranian economy, but the nuclear movement has not died down and it may even have intensified.

The major question is how much time should we, or maybe more importantly does Israel give, for the economic sanctions to cause a policy shift in Iran? Nobody knows the exact time frame, but from the comments of the Israeli Prime Minister, it seems that the time is not too far off.

The development of the Fordow Fuel Enrichment Plant also suggests that a strike could be soon. The plant is nearing protective completion, where not even the strongest bomber in the Israeli arsenal could destroy the plant.

The US has also projected that Iran is capable of producing a nuclear bomb within a one-year time frame.

So, let's assume that the economic sanctions do not work. What will happen? And who wins? Well, it's likely then that either Israel will go on a bombing mission itself or will go hand-in-hand to the US or Nato for help.

When the world is at war, who should we turn to? Northrop Grumman (NYSE:NOC) and Lockheed Martin (NYSE:LMT), both of them global security companies who produce the latest technology used in warfare from missile systems and planes to communication systems in combat.

The big risk with these names is that the US cuts defense spending when it starts to address the fiscal deficit. However, this said, an interesting trend would be: the US has and will leave Iraq and Afghanistan, respectively. Thus the dollar that would have been spent on troop kit equipment, food etc. will now be freed up. Given the US will not want to slash defense spending wholly, it is quite likely that a shift within spending goes from mass production of lighter-on-the-ground goods to more heavy, technologically advanced in-the-air goods like missiles and planes. This would also support the type of requirements for a raid in Iran similar to that in Libya for example, but on a much grander level, given the defense systems Iran is building.

Looking at my Bloomberg, both of these industry leading names are at extraordinarily cheap multiples. Lockheed is at 9.38x with a 4.5% dividend, and Northrop is at 9.27x with a 3.3% dividend. It appears the market is pricing in defense-spending cutbacks, and no conflicts.

In my eyes, you are being paid to wait for the Iranian situation to kick off, and global tensions to increase. The US going forward won't be the only driver of global defense spending, China has for the past few years increased its budget year on year with double-digit growth. I am not saying we will return to a cold war situation, because that is still a long shot from the current balance. But the push to create jobs globally, and maintain power, while developing leading technology will maintain and increase defense spending.

Other winners from a bombing campaign in Iran would likely include oil and gas (in the short term at least), as the strait of Hormuz could be shut; and the dollar/yen, as the world goes into a risk-off, safe-haven mode.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.