In Defense of Defense Stocks

A story on Covestor details five reasons why defense stocks could outperform. The article, by Michael Tarsala, states that, when Russian President Vladimir Putin spends $770 billion on 400 new nukes and 2,300 new tanks, that is a challenge to the U.S. to keep up. Tarsala then details five reasons that American defense spending is unlikely to weaken in the coming years. The first, he says, is that “Fears may have been more than factored in”, by which he means that the worst of the budget fears may have been priced into the market by late last year. The second point is particularly significant, because Tarsala believes that “even modest cuts may be pushed back”. This is huge, particularly in light of the fact that Washington is planning $487 billion in long-term defense cuts. Of course, the forthcoming election will have a big impact on those planned cuts. Ties between China and the U.S. are weak, especially with the President planning on sending the military to the South China Sea. Another big factor is that the market seems to be dismissive of any notion of defense cuts. It simply does not believe it will happen. Finally, nothing moves the market like money, and model managers are still buying defense names. “Buying continues,” says Tarsala, “even after the group's run from the August lows. ASB Capital, which runs a Large Cap Core Equity strategy that has beaten the market's return since February last year, bought United Technology this month at a price of $81.20. Note that Motley Fool considers United Tech a possible "Buffett" play.” Read the full article here.