Protect Your September with 4 Great Aerospace Stocks

With what trepidation did investors turn the page to September? Were they expecting another sell-off with the global economy in the dumps or did they believe that the market correction will find its rightful end? Historical data reveals that the three-month period between August and October happens to be the most volatile of the year.

Though the latest turbulence has been largely attributed to signs of global economic doldrums led by China's downturn as well as the unsure outlook for U.S. interest rates, increased volatility and sudden sell-offs are not unusual for late summer.

This year, the Dow entered the month of September with a 470-point plunge. Dow Jones U.S. Aerospace Total Stock Market Industry also kept the trend, declining 2.2% at the start of this month.

However, defense spending, the primary driver in the aerospace and defense space, remained unabated in spite of the global uncertainties taking a toll on the markets overall. Elevated geopolitical risk appears to be fueling support in Washington for an increase in fiscal 2016 defense spending above sequestration caps.

This sector has emerged relatively unscathed on the back of fleet renewals at airlines worldwide with more fuel efficient aircraft, a growing international market and increasing application of unmanned aircraft in warfare today.

Further, rising threat from the Islamic State in Iraq and Syria (ISIS, or ISIL) saw an increase in U.S. defense expenditure. Although sequestration is still a headwind, defense occupies the largest share of the spending pie in the U.S.

Meanwhile, Congress is headed into a stirring debate over the nuclear agreement with Iran as it returned from its August recess this week. Obama signed a law in May that gave Congress a 60-day window, ending Sep 17 or precisely next week, to vote on the nuclear agreement between the U.S., five other world powers and Tehran.

Although the debate is still raging, an Iran nuclear deal could mean a new arms race in the Middle East along with better relations between historic enemies. However, some argue that if Iran is freed from economic sanctions and arms embargo, the Islamic State group may prove to be even more assertive. Ironically, wars and regional tensions have always proved to be a boon for the defense sector.

So, investors need not get overly worried with the volatility in September. Rate hike (or lack thereof); a politically unstable planet will ensure that the arms merchants are not out of business.

Defensive Shields

To protect your portfolio with some really feisty stocks, we ran a screen for companies that have a market cap of over $100 million and also have a solid Zacks Rank to boast. Below, we have listed four such stocks with encouraging prospects.

Northrop Grumman Corp. NOC has a strong presence in the Air Force as well as Space & Cyber Security programs. Revenue and earnings growth continue to be driven by its wide presence in the current focus areas of cyber security, modernization of defense and homeland security assets, intelligence, surveillance and reconnaissance ("ISR") systems, advanced electronics and software development.

This $31.48-billion-market-cap-defense Zacks Ranked #2 (Buy) player is a major member of the Lockheed Martin LMT led team for the F-35, the industry's costliest program.

P/E (F1): 17.33 (versus 18.3 for the industry)

This year's expected EPS growth rate: 8.54%

Spirit AeroSystems Holdings Inc. SPR – a Wichita, KS-based company – is a manufacturer and supplier of large aircraft structures. Commercial aircraft manufacturer Boeing Co. BA has to depend on Spirit AeroSystems for bare fuselages of its 737 and 787 airplanes. 737 is currently the best-selling single-aisle airplane with demand increasing each passing day. Moreover, Boeing's decision to ramp up the 737 Next Generation production rate in response to strong market demand will prove beneficial for Spirit AeroSystems.

And it's not just Boeing that Spirit AeroSystems contributes to. There are other commercial and aerospace programs of which the company is a part. Spirit AeroSystems' involvement in the A350 XWB Program could further strengthen its top line. It has a market cap of $7.32 billion and holds a Zacks Rank #2.

P/E: 13.1 (versus 16.5 for the industry)
This year's expected EPS growth rate: 10.12%

LMI Aerospace Inc. LMIA – a Zacks Rank #1 (Strong Buy) company − is engaged in manufacturing components for a wide variety of aerospace applications for more than 50 years. It supplies structural solutions and engineering services to the aerospace market. During the second quarter of 2015, it won new contracts on both the Boeing 737 MAX and 787-10 programs. The company also achieved a strategic win on the Airbus A350-900 XWB program. These should amply support its long-term prospects.

St. Louis-based LMI Aerospace already has plans to reshape its Aerostructures business and has shown improving operating profit in the first half of 2015.

Though it's a little pricey, the company's expected EPS growth rate for the year stands at an impressive 137.7%. It has a market cap of $152.85 million.

Leidos Holdings, Inc. LDOS provides science and technology solutions in the areas of national security, engineering and health. It sports a Zacks Rank #1 and has a market cap of $3.06 billion.

The backlog at the end of the second quarter was $10.2 billion with an additional $13 billion in outstanding bids. The company scored three big wins in July and August that will likely push shares higher. These wins will also help it to boost its top line at a time of drastic defense cuts. Thanks to the strong second quarter, the company raised its full year earnings guidance as well.

P/E: 16.2 (versus 16.5 for the industry)
This year's expected EPS growth rate: 1.17%

Notably, all the four stocks have delivered positive earnings surprises in the second quarter of 2015.

Forward Looking

Lament not the end of summer and fear not the September chills if you have these four defense stocks shielding your portfolio. We advise investors to consider this trouble-free and proven investment strategy of putting in money where the fundamentals are strong.

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NORTHROP GRUMMN NOC: Free Stock Analysis Report
 
BOEING CO BA: Free Stock Analysis Report
 
SPIRIT AEROSYS SPR: Free Stock Analysis Report
 
LOCKHEED MARTIN LMT: Free Stock Analysis Report
 
LMI AEROSPACE LMIA: Free Stock Analysis Report
 
LEIDOS HOLDINGS LDOS: Free Stock Analysis Report
 
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