Short Interest Swings in Defense Stocks (BA, FLIR, HII)

By and large short sellers of defense stocks were not spurred to further action when the federal budget sequester went into effect.

The number of shares sold short in Alliant Techsystems ATK, Esterline Technologies ESL and General Dynamics GD increased somewhat between the February 28 and March 15 settlement dates.

But short interest in HEICO HEI, Hexel HXL, L-3 Communications LLL, Northrop Grumman NOC, Raytheon RTN, Rockwell Collins COL, Textron TXT, TransDigm TDG and United Technologies UTX declined marginally during that time.

However, three defense companies saw larger swings in short interest between the February 28 and March 15 settlement dates. They were Boeing BA, FLIR Systems FLIR and Huntington Ingalls Industries HII.

Boeing

This Chicago-based aerospace and defense company saw short interest rise about 22 percent in early March to more than 11.76 million shares. That was the greatest number of shares sold short in at least a year. Short interest was less than two percent of the float.

Boeing strived to get its grounded 787 Dreamliner back in the air in early March. The company currently has a market cap of about $18.8 billion and a dividend yield near 2.3 percent. Note that the long-term earnings per share (EPS) growth forecast is more than 13 percent and the return on equity is about 83 percent.

Of the 24 analysts who follow the stock that were surveyed by Thomson/First Call, 11 rate it at Strong Buy and another eight also recommend buying shares. Their mean price target, or where they expect the share price to go, represents more than five percent potential upside, relative to the current share price. That target would be a new multiyear high.

The share price is up more than 12 percent year-to-date and reached a 52-week high yesterday. The stock has outperformed competitors Lockheed-Martin LMT and Northrop Grumman, as well as the broader markets, over the past six months.

FLIR Systems

Shares sold short in this manufacturer of thermal imaging systems surged about 93 percent to about 2.17 million, which was the highest level of short interest since last July. Days to cover rose to more than two. The short interest was about three percent of the total float.

This Oregon-based company has a market capitalization of less than $4 billion and a dividend yield near 1.4 percent. It posted better-than-expected earnings in the most recent quarterly report, and is expect to report year-over-year EPS and revenue growth in the current quarter. Its long-term EPS growth forecast is more than 12 percent. The price-to-earnings (P/E) ratio is greater than the industry average, but so is its operating margin.

Out of 11 analysts polled, six recommend holding shares and four of them buying shares. The analysts' mean price target indicates upside potential of about 10 percent. That target would be a new 52-week high.

The share price is up almost 10 percent year to date, most of that coming in a surge following the earnings report. Shares are trading in the same neighborhood as a year ago. But over the past six months, the stock has outperformed competitor L-3 Communications and the broader markets.

Huntington Ingalls Industries

Short interest in this shipbuilder for the U.S. Navy and Coast Guard declined about 18 percent in the period to 1.22 million shares. That was the lowest number of shares sold short in at least a year, and it represents about 2.5 percent of the total float.

In early March, Huntington Ingalls was awarded additional funding for a nuclear-powered aircraft carrier, and it reached a contract agreement with the United Steelworkers. The company has a market cap near $2.6 billion and a dividend yield of about 0.8 percent. The long-term EPS growth forecast is about 18 percent, and the return on equity is more than 19 percent.

The consensus recommendation of 14 surveyed analysts is to hold the shares, and it has been for at least three months. The current share price has outrun the mean price target, meaning that on average the analysts see no upside potential at this time.

The share price has pulled back from a recent 52-week high, but it is still up more than 20 percent year-to-date. The stock has outperformed General Dynamics and the Down Jones Industrial Average over the past six months.