Defense Stocks Ignore Sequestration

Takeaway: Despite the sequestration, defense stocks are sitting near multi-year highs. Here's why and why it might not stay that way.

Here's an excerpt from a note that Industrials sector head Jay Van Sciver wrote to his insitutional clients earlier this week about the performance of  stocks in the defense sector.


He writes:


"Who would have thought that a couple of months after sequestration, many defense stocks would be sitting near multi-year highs? 


When consensus on a group is fairly uniform, it can present challenges and Defense has been heavily out of favor.  Easing concerns around the U.S. budget deficit and hawkish sentiment with respect to North Korea, Syria and Chinese hacking have no doubt helped boost the shares."


Defense Stocks Ignore Sequestration - Aerospace


Van Sciver continues:


"We would not chase defense shares here.  In a longer-term context, the post-sequestration rally is just a squiggle at the top of a defense spending driven mountain. 


As we understand it, much of the impact of either sequestration or whatever agreement supersedes it, should come in later years.  Further, orders received today will usually not generate revenue for months and years.  Military retirement, healthcare and other benefit costs are set to rise meaningfully in coming years, potentially crimping procurement spending. 


The nature of weapons seems to be shifting toward lower cost/unit unmanned drones and there are risks for contractors as this defense transformation plays out.  Reduced overseas commitments and a lack of prime contractor consolidation prospects may also be negative."



Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more