Turbulence in aerospace & defense has eased

Prospects for aerospace & defense stocks have improved, according to Fidelity’s Janet Glazer, as commercial air traffic reached 90% of pre-pandemic levels, while countries and governments around the world planned for increased defense spending.

“This promising recovery in air traffic has largely been driven by pent-up demand for leisure travel,” says Glazer, portfolio manager of Fidelity^® Select Industrials Portfolio (FCYIX), which maintains outsized exposure to aerospace & defense stocks. “Although it could take several years for this recovery to fully materialize, I believe it’s a sound long-term play.”

Glazer notes that although we’re still dealing with the ever-present risk of coronavirus variants and subvariants, people have learned how to better manage their lives in this environment and are traveling again for both business and pleasure.

In fact, she says, we need only look back to this summer, when increased willingness to take to the skies resulted in widespread flight delays and cancellations. Behind the scenes of these increasingly full flights, Glazer underscores the critical importance of aircraft parts suppliers.

Specifically, she cites two companies, Heico (HEI) and TransDigm Group (TDG)—major holdings as of August 31—that she believes are well-positioned for the long term. Each has an exceptional management team, generates strong free cash flow, is skilled at capital allocation, and possesses meaningful pricing power, in Glazer’s view.

On the defense side, she points to Russia’s invasion of Ukraine as a pivotal catalyst. “The conflict has raised awareness that many countries have chronically underspent on defense for the past two decades, if not more,” Glazer explains.

With the U.S. and Europe bolstering defense budgets in the medium term, she has focused on major contractors, including Lockheed Martin (LMT)—a new position that she recently built into a sizable core fund holding—as well as Raytheon Technologies (RTX).

Glazer also has favored multi-industry players with a strong foothold in defense and fundamentals poised to accelerate. Among them, she cites Teledyne Technologies (TDY), Honeywell International (HON), and Ametek (AME). The former is particularly appealing, in her opinion, with niche businesses in water, defense, and electronics.

“Cyclical stocks, including those in aerospace & defense, often exhibit repeatable patterns, providing opportunities for disciplined investors like myself, whose investment time horizon spans industry cycles,” Glazer concludes.

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