The Republican tax cut bill is moving forward. And while the jury remains out on whether the plan will actually help the American economy, it is certainly juicing the stock market.
Companies that book much of their revenue in the U.S. have been on a tear as a result. Take Verizon Communications (VZ), for example, which I recently highlighted as a beneficiary of both tax reform and the possible rollback of net neutrality. Shares of Verizon have gained about 8% in the past week while the broader S&P 500 (.SPX) is up around 1%.
But as the old saying goes on Wall Street, buy the rumor and sell the news. And it’s undeniable that a big reason for a lot of the 2017 rally across the stock market has been the notion that tax cuts were a foregone conclusion in Republican-dominated Washington.
So, after the tax bill is signed, then what? It’s an open secret that the White House has no clear agenda or legislative plan for 2018 after this tax effort. The twice-failed Obamacare repeal efforts are proof that a fractured GOP may not be able to make hard decisions or ambitious plans even with a majority on paper. Throw in what is sure to be a bare-knuckles midterm election year, and things look pretty dicey.
That leaves only one other area, in my mind, that will benefit from the political environment next year: Defense.
Just about the only thing that Republicans can agree on these days is loyalty to U.S. troops — and to the corporations that supply the military with weapons and war machines. So it’s time now to focus on the next big Washington-driven trend: defense stocks — particularly these three companies:
Boeing’s (BA) real utility in the 21st Century comes from unmanned attack and reconnaissance drones. The use of drones is perhaps the most important element of our modern military. Drones keep troops safer and are much more cost-effective than the sophisticated fighter jets and bombers of ages past. Boeing is already at the top of its game, but continues to evolve and improve – as evidenced by its recent acquisition of drone technology firm Aurora Flight Sciences.
The real proof of Boeing’s investment potential should come from an impressive run of more than 70% across 2017 — even as its backlog of military contracts has remained fairly unimpressive as of late. If the Defense Department increases spending in 2018, this run is only the beginning.
Throw in the fact that dividends have soared more than 255% in the last 10 years, from 40 cents quarterly to $1.42, and it’s hard not to like Boeing’s outlook.
2. Northrop Grumman
Holiday shopping for retail stocks
Strategically important B-2 stealth bombers are the product of Northrop Grumman (NOC). In addition, Northrop Grumman has pushed into cybersecurity in a big way, and recently won recognition as one of the best places for cybersecurity experts to work from the SANS Institute, a global leader in information security training. Particularly after the 2016 presidential election, the threat of hacking the polls in a midterm election makes this arm of the business even more important over the next 12 months.
Northrop’s stock hasn’t put up quite the results this year that Boeing stock has, but its 31% gain year-to-date is almost double that of the S&P. That bodes well for 2018 with the defense sector enjoying a tailwind.
3. Lockheed Martin
Recent tests over the Pacific Ocean to fine tune U.S. missile-defense technology are a good illustration of the stakes right now as tensions rise with North Korea. So it’s particularly noteworthy that those tests have been deployed using the Aegis Combat System, a naval weapons technology operated by Lockheed Martin (LMT).
This is truly a 21st Century defense technology, targeting land targets and submarines as well as surface-to-air missiles that can take down aircraft, cruise missiles, and even intercontinental ballistic missiles.
Lockheed is also in charge of what could be the last great warplane — the F-35 joint strike fighter. While the production has not been without snags and cost overruns, with estimates now over $400 billion for the F-35 program, Lockheed is cashing those checks. With increased military tensions and the White House’s general favorability towards defense spending, Lockheed’s fortunes seem unlikely to change soon.
Lockheed also pays a 2.5% dividend, with payouts that have grown more than fourfold in the last decade from 42 cents per quarter in 2008 to more than $2. The stock is up 28% so far in 2017 and should appreciate as well in 2018.
|For more news you can use to help guide your financial life, visit our Insights page.|