A Defense Sector Pair Trade From Goldman Sachs

• Harris Corporation HRS gained 5.7 percent year-to-date, while Orbital ATK Inc OA and L-3 Communications Holdings, Inc. LLL have declined 34 and 16 percent, respectively.
• Goldman Sachs' analyst Noah Poponak upgraded Harris and Orbital ATK to Buy from Neutral, while he downgraded L-3 Communications to Neutral.
• Poponak said the firm still favors the Defense sector, with opportunities for "underappreciated growth" in select names.

Though Goldman Sachs reiterated that Northrop Grumman Corporation NOC and Lockheed Martin Corporation LMT were the firm's favorite defense industry names, the firm upgraded Harris Corporation and Orbital ATK to Buy, noting that the companies were "opportunistic ways to invest in Defense" given their recent pullback.

Poponak said that Harris' orders and organic revenue was experiencing accelerating growth, a factor that contributed to the upgrade. Simultaneously, the firm is optimistic that Harris' "new domestic tactical radio programs" were occurring – and anticipated that they would be large. On Orbital ATK, Poponak said that the company had "multiple unique exposures to drive faster than average 3-year growth."

Conversely, Poponak said that execution at L-3 Communications was "concerning," arguing that it "may not end soon." While Goldman labeled L-3 Communications' free cash yield "compelling," it said that that yield has not moved in recent years, diminishing the firm's excitement levels.