Defense Stocks Are in a Funk. Their Earnings Could End It.

Defense stocks have been a little like the federal government lately: not working.

The aerospace and defense components of the S&P 500 dropped 10% in 2018 even though earnings increased nearly 13%. The sector now trades for about 16 times estimated 2019 earnings, down from 21 times a year ago. Those cheaper valuations, plus a solid outlook for military spending, are two good reasons to revisit the sector now. If you need a third, Barron’s likes defense.

We made a bullish call on Boeing (ticker: BA) stock in November, the same month we warned about a coming hypersonic arms race that could channel more cash to defense companies. Lockheed Martin (LMT) and Northrop Grumman (NOC) are two of the Barron’s Roundtable picks for 2019.

A year ago, when valuations in the sector were higher, investors were more comfortable with the outlook for military spending and the federal government hadn’t just been closed for five weeks.

Whether the government is operating probably isn’t a big deal for the stocks. “The shutdown won’t affect military spending,” Cowendefense analyst Cai von Rumhor wrote on Tuesday, saying “most defense large capitalization companies will beat Wall Street fourth-quarter estimates.”

Friday afternoon, President Donald Trump revealed a deal with Democrats to reopen operations for three weeks, an agreement that doesn’t include the $5.7 billion he has sought for a wall on the Mexican border. more

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