Trade of the Day: Two Choices In Aerospace & Defense - 2/13/14
Today's Trade of the Day is a double feature! Aerospace & Defense has been one of the strongest sub-industries in the market for over a year now. While the mid-January correction in major indices really soured some technical pictures in certain spaces, Aerospace & Defense held up extremely well, maintaining its strong intermediate- and long-term up-trend. The constituents are strong buys this week, as market leaders at a short-term discount are hard to come by.
Basically, there are two ways to play. The first is to pick out an Aerospace & Defense constituent that is similar to the sub-industry, but has a higher beta. Exelis Inc (XLS) seems like the perfect choice for this route. The stock has moved mostly in line with the greater Aerospace & Defense sub-industry (see similarities between XLS and ITA), though has generally outperformed. There is some great short-term support around $18.70, and the stock has clear upside to recent highs of $20.80. XLS looks to have righted the ship following the January pull-back and is beginning to enter the overbought stochastic, meaning buyers are stepping in in a meaningful way.
The other way to play is to buy the sub-industry itself using the iShares U.S. Aerospace & Defense ETF (ITA). ITA's top ten holdings are 9.22% UTX, 8.7% BA, 6.83% LMT, 6.16% PCP, 6.14% GD, 5.6% RTN, 5.14% NOC, 3.47% TXT, 3.42% COL, and 3.4% LLL. This ETF gives a nice mix of holdings that represents the sub-industry well and has performed admirably as a whole. The ITA has a lower beta than XLS, which means the upside is not as great. On the positive side, it also means a smoother ride for those looking to capitalize on the Aerospace & Defense set-up but want to avoid individual stock-specific risks like earnings or analyst ratings. ITA's set-up is nearly identical to XLS's, there is just less risk and lower potential reward.
For XLS: Upside from current prices to $20.80 is +5.58%, downside risk to a stop of $18.63 is -5.43%.
For ITA: Upside from current prices to $110.49 is +3.45%, downside risk to a stop of $103.47 is -3.11%
Both have similar reward to risk ratios, and the technical set-ups of the two are nearly identical. So, depending on whether you want to play bigger or smaller, take your pick! Either choice is a great play this afternoon.
Buy XLS at the current price (~$19.70), or ITA at the current price (~$106.80).
Sell at a close below $18.63 for XLS, $103.47 for ITA (Breakdown) / An intraday price of $20.80 for XLS, $105.63 for ITA or above (Profit-Taking)
Exelis Inc. (Exelis) is engaged in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) related products and systems and information and technical services, which the Company supplies to military, government and commercial customers in the United States and globally. The Company's customers include the United States Department of Defense (DoD), including the United States Army, Navy, Marines and Air Force, and its prime contractors, the United States Government intelligence agencies, National Aeronautics and Space Administration (NASA), Federal Aviation Administration (FAA), allied foreign governments and domestic and foreign commercial customers. As a prime contractor, subcontractor, or preferred supplier, the Company participates in many high priority defense and non-defense programs in the United States. In February 2014, Exelis, Inc purchased FareSight, ARC's Web-based tool for corporate air travel optimization.
iShares U.S. Aerospace & Defense ETF, formerly iShares Dow Jones U.S. Aerospace & Defense Index Fund (the Fund), is an exchange-traded fund. The Fund seeks investment results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Aerospace & Defense Index (the Index). The Index measures the performance of the aerospace and defense sector of the United States equity market. Aerospace companies include manufacturers, assemblers and distributors of aircraft and aircraft parts. Defense companies include producers of components and equipment for the defense industry, such as military aircraft, radar equipment and weapons. The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Its investment advisor is BlackRock Fund Advisors.
The Stock Rating indicates the combined score of our proprietary Earning Strength and Company Performance models. The rating scale is 0 - 10 with 10 being the highest.
At the time of publication the editor and affiliated companies own the following positions: None
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