Norman Tweed's  Instablog

RTN

6/10/2011

We have come upon the summer sale of stocks, after the “Sell in May and Go away” month. The market has been trending down since April and the SPY appears headed for a pullback of possibly 10%. There is a lot of unrest, especially in the oil patch of the Middle East and Leftist governments in South America seem to have their eyes on foreign company assets.

With all the hacker attacks on financial, gaming, and even military suppliers, it appears that security has become paramount this summer:

http://seekingalpha.com/article/274255-cyber-attacks-and-war-declarations-which-companies-may-benefit

Will there be budget cutbacks in the face of these challenges? Robert Gates, in his final policy speech as Pentagon chief questioned the viability of NATO.

http://news.yahoo.com/s/ap/20110610/ap_on_re_eu/eu_gates_nato_doomed

I believe this is the time to buy defense stocks, like RTN, especially at 4% yield.

First, let's look at the financials of RTN. It is a Dividend Challenger with 7 years of consecutive dividend increases, sporting a 3.52% yield and a 35% payout ratio. Last year's dividend growth rate was 18.6% and the 5year dividend growth rate has been 10.8%. The price chart has been cyclical around $40 since 2000, spiking to $65 in 2008 and $58 last April 2010. Presently it is holding at $48.40.

The p/e ratio is 10.4 with a forward p/e of 9.6. Earnings (First Call) for the period 2010-2013 are projected to be $4.79, 4.88, 5.55, 6.29 with a 5 year projected growth rate of 14.2%. PEG ratio is .75. With both sound dividend yield, high dividend growth rate, a p/e in excess of 14 could be calculated. With the high earnings growth rate, the same could be calculated. Why does the stock languish?

Let's look at it's business:

Raytheon Company, together with its subsidiaries, provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support.

I believe that the current governmental budget uncertainty has made all defense stocks suspect. One must ask themselves if the United States of America will default on its bonds and shun its missions throughout the world. My answer to that question is absolutely not!

What should be the entry price of this stock? I would shoot for 4% yield. With the current dividend of $1.72, this would set a price of $43, which it touched last August.

How would you like to buy a CCC stock with good yield + high dividend growth rate? Add to that a Chinese market exposure:

seekingalpha.com/article/268076-astrazen...

Finally, strong earnings per share growth and safety of principal provide an excellent investment.

Let's look at the CCC status:

Earnings Per Share 2010-2013

The expected annual growth rate for the 5 year period is 15.5% (First Call).

The gross margin will be 85-86% for 2011. However, patent expirations will lower earnings per share growth after 2011.

What are the downsides of this stock? It is a foreign stock headquartered in the UK. It pays dividends twice per year in unequal installments. The first installment for 2011 was $1.85 on February 2, 2011 and the last installment is expected in August around $0.57. The stock has been cyclical since 1998 averaging around $50.

We are moving into a defensive rotation in stocks. Healthcare sector is beginning to pick up, having risen 20% over the last year. If purchased today for speculation, a sell point should be figured in for 2013. If purchased for dividend + dividend growth rate, a fair p/e could be as high as 16.

Norman Tweed

05/09/2011

Many market pundits believe the market is over valued and ready for a pullback. “Sell in May and Go away” is on their tongues. Seasonally, I believe they are correct. However, this is an opportunity rather than a catastrophe. Sector rotation is basic to the business cycle. This Stock Charts link can be used to follow rotations from January 4, 1999 to the present. Note: When you get to the chart and it says error, drop down to select a PerfChart and select S&P Sector ETFs. the best effects can be obtained by clicking the bar chart button at lower left. If you want to animate the chart, right click on the chart and select “animate”.

http://stockcharts.com/freecharts/perf.html?[SECT]
 

As you slide through the cycle, notice how the bars move in a cyclical motion, like an engine. To every sector there is a time of growth and out performance, and then a time of under performance.

Notice how healthcare sector followed the market into the Great Recession of 2008, but didn't fall as far. Also notice how it got back to neutral in late 2009. At the present point in the cycle, healthcare appears to be on the rise. Why is that? In my opinion, it has to do with healthcare stocks being overly beaten down with the rest of the market, at a time they were making money. P/E ratios for healthcare stocks are hovering around 10, while yields are nearing 5% globally. There is a distinct movement towards high yield stocks, with 10 year treasuries yielding 3.43%. ^HCX is up 7.71% for this year and up 1.1% today, while SPY is up only 5.13% for the year.

As you play the link above, get a feeling for the rhythm of the cycle. You too may become a healthcare junkie!

Disclosure:  I am long Healthcare stocks.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.