Lockheed Martin: A Good Buy Gets Better - State Department Revolt Over U.S. Syria Policy

| About: Lockheed Martin (LMT)
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Lead NY Times headline likely to spur national defense efforts.

Lockheed-Martin, now a best of breed Risk~Reward buy, will benefit further.

Big-money investment organizations are increasing their asset allocations.

The handwriting is on the wall

In letters so big ya have to holler to read 'em.

Here's the NY Times lead article today: 51 U.S. Diplomats Urge Strikes Against Assad in Syria.

Neither Brexit nor a muddled Fed is likely to deter public reaction (and investor actions) to the potential for major changes in failed US foreign policy over the last 7+ years.

When we look at market-maker hedging reactions to block trade orders being placed by big-money fund clients, here's how they assess near-term upside price prospects for the Aerospace and Defense stocks. (The green horizontal scale.)

Figure 1

(used with permission)

The red vertical risk scale measures the average worst-case percentage price drawdowns seen during holding periods on the way to those upside price targets. Number [4] is Lockheed-Martin (NYSE:LMT), with the best reward-to-risk tradeoff of the bunch.

Sure, if shoot-the-lights-out is your thing there are others with twice the upside. But none with less risk exposure.

Let's see (Figure 2) what LMT price performance has been over the past 5 years.

Figure 2

source: blockdesk.com

When you take each day of the past 5 years and measure how its price has changed (at CAGR rates) over the next 16 weeks and average them all together, including the interim weeks, the blue row is what you get. That's right, LMT trend-line growth has been at a CAGR of 25%+, no further analysis involved, just straight price history.

Where the other rows come from is by knowing what the market-makers thought (at each day) their big-money clients were likely to do to LMT's coming prices. Not just as a single-point upside target, but as a range - up and down - of what could happen.

Why they had to have an idea of that range is because they typically had to facilitate those big trade orders by putting firm capital at risk temporarily. Too smart to take the risk, either long or short, they hedge-protect the exposures. Too frugal to overpay for the price-change insurance, they want to have a good idea of the likely prospects.

The hedge specifics tell what the likely coming price range looks like - in the cauldron of the derivatives markets, where the protection deals are negotiated. And the ranges often are not symmetrically related to the current price.

That's where the row headers of RWD:RSK come from.

Each row, as it steps away from the trendline blue row, includes only those price range forecasts with the more extreme balances between risk and reward. The payoff comes from picking times to act when better price prospects are at hand.

Like now, indicated by the magenta numbers in the #BUYS count of such forecasts - or better - at the 5:1 row. The 223 prior forecasts with upside price change potentials 5 times as large as the downsides held to be likely are about one sixth of the 1256 measurable days of the past 5 years.

That's a pretty big sample to draw conclusions from. It says that CAGRs of +35%-40% have been the typical price changes for LMT when these kinds of forecasts were seen. The bright white numbers out at the 40+ week holding periods indicate that their difference from the +27% blue trend CAGRs are statistically significant, not simply an accident of data peculiarities.

Big payoff prospects. But how likely are they to come to your pocket? Figure 3 tells what percent of the measurable forecasts from Figure 2 produced profits.

Figure 3

source: blockdesk.com

Nothing in life (but death and taxes) is certain, including big Win Odds. But having 9 out of 10 chances is a lot better than the market's typical coin-flip odds, and even better than LMT's trend-line 6 out of 8 to 8 out of 10.


Keep it simple. There are dog stocks and good ones. There are better times and worse ones to buy the good stocks. There are folks who know when those better times are.

To them, now looks like a pretty good time to be buying LMT. But it's your capital to be at risk, so you decide. What are your alternatives?

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier) helping professional and [now] individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations. We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LMT over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.