It may be somewhat of a paradox, but Lockheed Martin could potentially be a major beneficiary of a worsening economy in the coming months. The reason for this is simply the increasing probability of a Romney Administration in the White House. With slowing job growth and erased gains in the market from its run earlier in the year, the recovery seems to have taken a turn for the worse, harming Obama's draw to voters. The economy has fared well under Republican presidencies for a multitude of reasons, but the benefit for defense stocks comes down to one: increased opportunities for government contracts.
Even if Romney were to win, it does not become an open ended cakewalk for cash with defense companies; the superior company must be chosen. This is where Lockheed Martin (NYSE:LMT) comes into play. Lockheed manufactures the most advanced fighter jets along with increasing its capabilities in cyber security and unmanned vehicles, giving it the best arsenal of products available to a constantly upgrading military. With a receding economy in the coming months, investing in the prospects of a Romney victory through defense is best done by purchasing Lockheed Martin; the company most likely to maximize the benefits of an escalation in military spending.
Lockheed Martin holds the greatest prospects for success under a Romney Administration because of the superiority and performance of its products and their ability to emerge victorious in competitions for contracts from the United States government. Lockheed offers a variety of defense services, including cyber security, aircraft, unmanned vehicles, and missile systems, among others. Unmanned technology is constantly becoming more integrated and more important to the effectiveness of our military, and Lockheed is developing products that will serve as next generation capabilities. The RQ-170 Sentinel, a stealth reconnaissance drone, is representative of these efforts and should prove to exceed the abilities of its competition.
Lockheed's product technology and quality can be seen in all of its services, but recently there was an example to prove just how good Lockheed truly is. The Trident II D5 Fleet Ballistic Missile reached 142 successful tests since its introduction in 1989, a number unmatched not only by other ballistic missiles, but by any space launch vehicle. If this is not a testament to Lockheed's exceptional ability to create advanced and all the while reliable products, I do not know what is.
Despite its diversification of products, Lockheed has invested much of its near-term future in the F-22 Raptor and F-35 Lightning. Both stealth and virtually unmatched in technology and ability, these planes are undoubtedly the future of fighter aircraft. The problem has not been the capability of the planes, it has been the expenses. It would not make sense to increase expenditures on conventional aircraft such as the Boeing (NYSE:BA) F/A-18 Super Hornet when efforts to modernize the military are constantly in effect, adding to the probability of a greater volume of orders. The F-35 gives the Navy an ability unlike any other with its stealth abilities paired with vertical take off, which is why it would be surprising if it did not become the future of U.S. Naval aviation, with the F-22 following a similar path in the Air Force. Lockheed Martin's excellent record in terms of products and advanced capabilities (even beyond the F-22 and F-35) place it as the front-runner to benefit most from an increased opportunity for government contracts.
If the economic numbers in May serve as a precursor for the November election, Romney has a solid chance of winning. Romney has continually expressed his desire to reduce spending in many areas, but defense has not been one of them. As CNN Money points out, estimates have concluded that Romney would increase defense spending by $2 trillion over the next decade. There is no question that defense expenditures would rise, but the uncertainty lies in where it would be spent. Some military experts have expressed the need to revamp conventional forces, while others think that it is in the military's best interest to invest in more advanced capabilities, such as the F-35. To me, if such a large scale spending hike is going to the military, it is logical to make the military more effective and more efficient by investing in newer technologies such as unmanned aircraft and stealth fighter aircraft (F-22/F-35).
Historically, defense stocks have fared well under Republicans for the precise reason that they will perform well under Romney. Under George W. Bush, prices of Lockheed Martin shares blew up, going from $20 to almost $120 a share (until the recession hit and it fell back to prices around $80, which is still a four fold increase). Yes, there were two wars under Bush that helped to propel the stock, but with growing tension in the Middle East over Iran's nuclear program, a continuation of American fighting in the region cannot be ruled out. Even if there are no more conflicts, the military's presence in Asia is being made a top priority and the potential threat of China gives more incentive to allocate money to the unrivaled new technologies that Lockheed is and has been producing. The defense industry's prospects under Romney are looking bright, and even brighter for Lockheed Martin.
If you are considering investing in Lockheed Martin, there are some risks to be acknowledged. The most obvious risk is the re-election of Obama. While clearly the defense industry would advocate for a Romney victory as it is in their best interest, an Obama victory would not be detrimental to the military or to Lockheed. Obama has no intention of spending remotely as much on defense as Romney plans to, but that does not mean that he will neglect the necessity of revamping the military.
Obama has not been as unfriendly to the military as he is made out to be. Do not forget that he allowed the strike on Bin Laden, has relentlessly approved drone strikes throughout the Middle East, and has not ruled out an attack on Iran. There is no evidence that would foreshadow a less military-friendly second term, especially with the need to boost military presence in Asia. Lockheed would still have the ability to succeed under Obama, but not nearly to the extent that it would under Romney and his defense spending policy. Nevertheless it would remain an attractive play.
Another serious concern is a continuation of the inability to compromise and pass a budget. If our politicians are incapable of doing this, automatic, across-the-board spending cuts (including defense) will take effect. This is actually more worrisome than the possibility of another four years under Obama, because the automatic spending cuts would directly harm the defense industry, while an Obama victory keeps the industry where it is currently and still provides for potential contracts.
An issue facing Lockheed in particular is the call by many military experts to renovate the nation's conventional forces, which would benefit Boeing products such as the F-15e Strike Eagle and the F/A-18 Super Hornet, and injure both F-22 and F-35 sales. This is a legitimate worry, but Lockheed does not solely rely on these two fighter jets and has a large and good enough variety of products to stay afloat if this decision were to be made (though I do not think that it will be).
On the technical side, Lockheed fell through both its 50- and 100-day moving averages in May. Lockheed did not see the resistance that it would have liked, but with the way the entire market fared in May it is not as frightening as it may appear. Lockheed still faces challenges that generally stem from Washington, but its potential is strong enough to outweigh the risks.
Lockheed Martin's extraordinary array of products give it a great chance to prosper under a President Romney. There is no saying whether or not Romney will win the election, but if unemployment and the general market (including Europe) does not get back on track rather soon, Obama is in serious trouble. The 200-day moving average is an important indicator for Lockheed, and if it is met with substantial resistance it may soon be the time to make an entry level position (and the 4.9% dividend definitely does not reduce its draw). It may still be hypothetical to an extent, but if Romney can defeat Obama and implement his defense spending increases, Lockheed Martin is in the premier position to maximize the potential of new government contracts.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LMT over the next 72 hours.