Defense Stocks Thriving Through Sequester Cuts

TheStreet.com

NEW YORK (TheStreet) -- On May 24 I wrote Defense Stocks Survive Sequester Cuts and since then all nine of the defense stocks I covered then are up. Eight of the stocks are up between 9.1% and 31%. In May only one of the stocks had a buy rating and one had a sell rating with the other seven rated hold. Today the distribution of the ratings is about the same but there are now two sell rated stocks.

It's difficult to explain why sequestration spending cuts have not had an adverse affect on the aerospace sector given the fact that the sector has an underweight rating with 64.9% of the 74 stocks in the sector having sell or strong sell ratings. In addition the sector is 24.9% overvalued. What this shows is that my buy-and-trade strategy works even when the fundamentals are not favorable. Positive technicals have trumped weak fundamentals at least between May 23 and Oct. 2.

Today all nine aerospace stocks are currently overvalued with eight overvalued by 20.5% and 29.5% and all nine gained between 25.9% and 69.5% over the last 12 months. All are above their 200-day simple moving averages reflecting the risk of a reversion to the mean.

A recent negative is that one stock has declined below its 50-day simple moving average, while another five straddle their 50-day SMAs, which could mean that the combination of sequestration cuts and a partial close of the U.S. government my finally be a drag on the aerospace sector.

Reading the Table

OV/UN Valued: Stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.

VE Rating: A "1-engine" rating is a strong sell, a "2-engine" rating is a sell, a "3-engine" rating is a hold, a "4-engine" rating is a buy and a "5-engine" rating is a strong buy.

Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last 12 months. Stocks with a black number increased by that percentage.

Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next 12 months. Stocks with a black number in the table are projected to move higher by that percentage over the next 12 months.

Value Level: Price at which to enter a GTC limit order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.

Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.

Risky Level: Price at which to enter a GTC limit order to sell on strength.

Boeing ($117.84 vs. $97.93 on May 23) traded to a new multi-year high at $120.38 on Sept. 19 and in the process was downgraded to sell from hold. My weekly value level is $112.04 with a quarterly pivot at $115.14 and monthly risky level at $126.05.

Rockwell Collins ($67.72 vs. $65.92 on May 23) had some downside recently. The multi-year high is $75.25 on Aug. 8, which was nearly retested on Sept. 19 and then hit the skids and is well below its 50-day SMA at $71.77. My weekly value level is $62.79 with a quarterly pivot at $70.49 and semiannual risky level at $71.99.

Curtis-Wright ($46.94 vs. $35.84 on May 23) set a new multi-year high at $48.40 on Sept. 18. This sell rated stock is the best performer since May 23. My quarterly value level is $45.53 with an annual pivot at $46.51.

General Dynamics ($87.51 vs. $77.42 on May 23) set a multi-year high at $89.94 on Sept. 19. My semiannual value level is $84.72 with an annual pivot at $86.80 and annual risky level at $90.45.

L 3 Communications ($93.93 vs. $85.81 on May 23) set a new multi-year high at $96.71 on Sept. 25 then declined to its 50-day SMA at $93.15 on Oct. 2. My weekly value level is $92.03 with a quarterly pivot at $97.02 and monthly risky level at $97.80.

Lockheed Martin ($125.08 vs. $106.49 on May 23) set a new multi-year high at $131.60 on Sept. 19 then fell to the 50-day SMA at $124.60 on Oct. 2. My annual value level is $112.40 with a quarterly pivot at $128.16 and monthly risky level at $134.36.

Northrop Grumman ($95.18 vs. $80.86 on May 23) set a new multi-year high at $99.10 on Sept. 19 then fell to its 50-day SMA at $94.48 on Oct. 2. My semiannual value level is $87.62 with a quarterly pivot at $94.68 and monthly risky level at $101.98.

Raytheon ($76.08 vs. $66.24 on May 23) set a new multi-year high at $81.26 on Sept. 19 then ended Oct. 3 below its 50-day SMA at $76.26. My annual value level is $69.36 with a weekly pivot at $79.31 and quarterly risky level at $81.69.

United Technologies ($104.98 vs. $96.25 on May 23) set a new multi-year high at $112.46 on Sept. 19 then ended Oct. 2 below its 50-day SMA at $105.65. My weekly value level is $103.68 with a semiannual pivot at $107.61 and monthly risky level at $108.97.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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