Why should investors be cautious chasing defense stocks
Last week, the Pentagon met with Lockheed Martin (NYSE:LMT), Raytheon Technologies (NYSE:RTX), and Boeing (NYSE:BA), among others, to discuss Ukraine-related weapons production.
The meeting comes as Biden announced more military aid for Ukraine:
- Last week, Biden announced $800M in military aid for Ukraine — including weapons and ammunition.
- Tuesday’s NBC report expects the release of another similar-sized package in the coming days.
Trend chasers beware: Since the invasion began, the SPDR S&P Aerospace & Defense ETF (NYSE:XAR) is up 14% — with the S&P 500 up 5.5% in the same period.
But according to WSJ — investors should be cautious with chasing the trend. Defense stocks jumped on past military conflicts,but fell as “the initial sense of danger dissipated.”
- During 9/11, global defense stocks peaked at 48% — 204 days after the initial event — just to lose all their gains 187 days later.
- Similar moves were seen during the North Korean nuclear crisis (2017-2018) and the Russian invasion of Georgia (2008).
Same issues, different industries: Like other sectors, defense companies are also being impacted by supply chain issues:
- Since reporting earnings on Tuesday, the world’s largest defense company — Lockheed Martin (NYSE:LMT) is down nearly 4% — with sales falling 8%.
- Lockheed blamed missing estimates on supply-chain shortages and COVID constraints — and doesn’t expect the war to have immediate positive impacts on its financials.