The Strongest Defense Stocks For When Volatility Is High

***Note: This message is part of Louis Navellier’s Market 360 e-letter series. If you don’t already receive these email alerts, and would like to, you may sign up to his mailing list here.***

Welcome to part one of Market Maneuvers—our special series to profit through the volatility.

As I mentioned on Tuesday, volatility is on the rise. Investors are skittish, and not sure if this is a dip to buy or a time to sell. With negative headlines dominating the news and a weak earnings season kicking off, I don’t blame anyone who is second guessing their investment strategy.

I’ve been navigating the market for more than 30 years, and my experience, access to data and honed investment strategy allows me to decipher what’s important, what can be ignored and what is really driving specific stocks. So, that is what we’re going to focus on in this special series.

In each communication, I’ll break down the most important events impacting the market. And then we’re going to take an industry-based approach to investing in this special series. Diversification is critical and there are some major opportunities and dangerous potholes in our path—the majority of which are in the biggest sectors that most investors consider “safe.”

Let’s start with the latest global developments…

Greece, China & the Fed

It’s been a relatively disappointing week for the global stock markets, as the Greece crisis and China chaos continue to weigh on investors’ minds. Greece currently has until Sunday to draft a new economic proposal or risk getting booted from the Eurozone. Yesterday, the coastal nation requested three more years of financing in exchange for certain tax and pension reforms. The Eurozone is looking for concrete reforms, so it remains to be seen if Greece will make Sunday’s deadline.

In China, authorities are scrambling to control the rout in the Shanghai Composite Index. Since mid-June, the index has shed about one-third of its total capitalization. The Chinese government has issued emergency measures, prohibiting controlling shareholders and executives from selling their shares for the next six months, halting all new IPOs and providing liquidity support. Thankfully, it look like these efforts are starting to pay off, as the Shanghai index increased about 6% today.

Yesterday’s release of the Federal Open Market Committee (FOMC) meeting minutes from June also garnered some attention. In the meeting minutes, FOMC members cited that the U.S. economy is improving, which has some pointing to an interest rate hike this year. However, the Greek crisis and China situation are being closely monitored as they could impact global economic growth going forward—and that would give the Fed another reason to keep key interest rates near zero.

Overall, the S&P 500 and Dow have both slipped this week, falling 1.4% and 1.2%, respectively. I urge you, however, not to add to the panic selling we’ve seen this week. Global markets are bouncing back strongly today, thanks in part to the rebound in the Shanghai Composite Index. Plus, we’re in the midst of second-quarter earnings announcement season—and while many multinational companies will show slowing sales and earnings, there are still many solid companies bucking the trend with stunning earnings and sales growth. Let’s consider a couple of these companies now…

The Positives & Negatives of Aerospace & Defense Stocks

The first sector I want to cover is Aerospace and Defense. Now, the Aerospace and Defense sector is often a prime target for the media, as defense spending (or should I say, defense spending cuts) is a hot political topic. Yet, when geopolitical crisis or terrorist threats emerge, these companies are in hot demand—and these days, there constantly seems to be geopolitical uncertainty somewhere in the world.

What’s interesting is that many Aerospace and Defense companies have expanded their portfolios and are no longer solely dependent on military contracts for the bulk of their business. In fact, along with supplying military aircraft, combat vehicles and weapons systems, these companies also provide communication and information technology, data analytics, energy solutions, robotics and much more!  

Of the nearly 5,000 stocks I cover in Portfolio Grader, 51 are categorized as Aerospace and Defense—though hundreds of companies provide the technology, information and services that contribute to this industry. If I created an index or ETF with all the stocks that I rank in this sector, I wouldn’t buy it. An equally weighted portfolio of these stocks would get a C grade (or a hold) from me at this time.

This would be a downgrade from last year when I covered 69 stocks and the group would have received a B grade overall. These stocks were also a B-rated buy in 2013.

Always weighing on this group of stocks is that they are big and predictable, it’s hard for them to post big earnings surprises because they are 1) so closely followed, and 2) are dependent on big contracts that are well structured and reported on.

That said, many have very stable businesses, a strong pipeline of work and tend to be a safe haven for investors looking for strength in size—32 of the companies I follow have a market cap of $1 billion or more.

So, while there are positives and negatives to owning Aerospace and Defense stocks, there are some very strong and very weak stocks that you should know about before adding these stocks to a portfolio.

At the top of my list to buy is TASER International (TASR), an Aerospace and Defense company that develops conducted electrical weapons (CEWs) that help protect law enforcement personnel around the world. It’s actually a mid-cap stock—so not one of the behemoth companies like $97 billion Boeing Company (BA), or the $80 billion Honeywell International (HON). (I’ll get to my top large-cap defense stock in a moment.)

What sets TASER apart from the rest is its excellent forecasted sales (19.9%) and earnings (28.6%) growth. By comparison, the Aerospace/Defense industry is expected to post just 11.6% annual earnings growth, on average, for the second quarter. TASER is scheduled to report earnings on July 30, and I expect it to make headlines. Last quarter, TASER beat the consensus EPS estimate by 117%.

When you run TASR through Portfolio Grader, the difference is clear. The Moderately Aggressive stock earns an A for its Quantitative Grade and a B for its Fundamental Grade. Looking closer at TASER’s fundamentals, it earns straight As for sales growth, earnings growth, analyst earnings revisions and return on equity. It also earns Bs on operating margin growth and earnings momentum. Its track record of earnings surprises and cash flow are C-rated, but the company’s overall fundamentals are stellar. TASR is an A-rated Strong Buy.

In the large cap arena, my top-rated stock is General Dynamics Corp. (GD), which is a big name in the Aerospace and Defense industry. Founded in 1952, General Dynamics has thrived thanks to its aggressive acquisition strategy. Since 1995, General Dynamics has acquired and integrated businesses to grow its portfolio. Today, the company operates in four main areas: Aerospace, Combat Systems, Marine Systems and Information Systems/Technology. GD also earns an A for Quantitative Grade, B for Fundamental Grade and has a 1.9% annual dividend yield to boot. GD is an A-rated Strong Buy.

I’ll be in touch on Tuesday with your next Market Maneuvers, so make sure that you’re signed up to my mailing list before then. We’ll be covering the latest headlines and the best opportunities in the financial sector.

Sincerely,

Louis Navellier

Louis Navellier

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