Which Defense Stocks to Buy Now

One of the best pieces of investment advice I could ever give you is this: Not all stocks in a sector are created equal.

In other words, if you hear that “this is a good time to buy X sector stocks,” you’ll still want to do your homework. I can guarantee there are still some duds in there that are NOT good buys. On the flip side, if “this is a bad time to buy Y sector stocks,” then you won’t want to overlook the strongest companies.

Right now, the conventional wisdom is that this is a good time to look at aerospace/defense.

And if you look at a chart, there’s good evidence for that.

People tend to race into defense stocks whenever there’s turmoil overseas. While it’s always troubling on a personal (and political) level, there is a silver lining economically. Major employers here in the U.S. in this space, like The Boeing Company (BA) and United Technologies (UTX), tend to see nice share-price appreciation.

That’s certainly been the case now. Below you can see it reflected in the iShares U.S. Aerospace & Defense ETF (ITA). The group has begun to strongly outperform the broad market on the heels of the attack on Saudi oil fields two weeks ago, and continuing tension with Iran. However…stocks like AeroVironment (AVAV) are, ultimately, not participating.

Chart: SPX, ITA, AVAV

AVAV, a California-based maker of unmanned aerial vehicles (UAVs), more commonly known as drones, is a comparatively small stock at just over $1 billion in market cap. So, it’s normally something I’d be looking at for Breakthrough Stocks.

Well…the Report Card from my Portfolio Grader (below) shows you why we are staying away:

AVAV Report Card

The picture for AVAV is not entirely bad; the company has a history of good sales growth and positive earnings surprises, as well as upward revisions in Wall Street analyst’s forecasts for the company, and cash flow.

However, other factors inspire serious concerns. Earnings Growth and Earnings Momentum could be a lot better; Operating Margin Growth is downright ugly.

Worst of all, AVAV currently scores an “F” for its Quantitative Grade. This suggests that big money on Wall Street is fleeing the stock. That is, in fact, the biggest factor in any growth investment’s long-term success – contributing to AVAV being a D-rated “Sell” at this time.

Meanwhile…another lesser known aerospace/defense play, Woodward (WWD), is looking a lot more appealing.

Take a look at my Report Card on WWD:

WWD Report Card

While Earnings Momentum leaves something to be desired, overall Woodward has strong fundamentals.

In early August, WWD crushed analysts’ earnings and sales estimates for its third quarter in fiscal year 2019. During the third quarter, sales increased 28% year-over-year to $752 million. That topped forecasts for sales of $694.08 million.

Third-quarter earnings per share jumped 32.5% year-over-year to $1.02, up from $0.77 per share in the same quarter a year ago. Adjusted earnings per share rose 16.1% year-over-year to $1.30. So, since analysts had only expected $1.16, the company posted a 12.1% earnings surprise.

Looking ahead, Woodward expects fiscal year 2019 sales of $2.9 billion, with aerospace sales rising 19% year-over-year and industrial sales jumping 35% year-over-year. Adjusted earnings per share are forecast to be between $4.70 and $4.80. That represents 24.5% annual sales growth and 22.1% to 24.7% annual earnings growth.

No wonder WWD shares are far outpacing the broad market and the sector, as we see here:

Chart: SPX, ITA, WWD

So now we see the context for not only the Fundamental Grade of “B,” but the Quantitative Grade of “A.” Major institutional cash is clearly finding a home in WWD, and it earns a spot in my Breakthrough Stocks model portfolio as well. That’s the kind of stock we should be looking for in this (and any) sector.

Timing is Everything

Even with some of the highest quality stocks in a sector, as is true of WWD for aerospace/defense, the most important thing is to get the timing right.

If you’re a growth investor – and I certainly am; I’ve made my career this way – then you’ve got to look for elite growth statistics like Woodward’s (and my other Breakthrough Stocks).

To get my buy price on WWD – and my list of Top 5 Stocks – check out Breakthrough Stocks now. When you do, you’ll learn all about my “Quantum A” system for identifying the best small-cap investments.

More Louis Navellier

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