Al Root
The worst election outcome for defense stocks just might a red wave, with a win for former President Donald Trump and Republican control of both houses of Congress.
Coming into Tuesday, large defense stocks have been doing well. Through Monday trading, shares of large defense contractors -- excluding Boeing's embattled stock -- were up about 25% over the past 12 months, trailing the S&P 500 by about 6 percentage points.
Typically, the election wouldn't matter much for defense stocks. Military spending is a bipartisan issue and geopolitical tensions remain high. This time, however, "a GOP sweep could pose substantially more risk," wrote Capital Alpha Partners analyst Byron Callan in a recent report.
Republican control of the Oval Office, House, and Senate would make it easier for President Donald Trump to implement his full economic program, including tax cuts, tariffs, and efforts to make the government more efficient.
While the consensus view might be that a GOP sweep would be positive, Callan said, that doesn't consider the impact of higher levels of government debt, or retaliatory tariffs in response to Trump's plan to increase import levies to boost domestic manufacturing.
"The role of Elon Musk in a Trump Administration could be a wild card for large U.S. primes and federal/defense services," Callan said. While Musk believes he could cut U.S. federal spending by trillions of dollars a year., some of that would likely come from defense.
The government has spent about $875 billion on defense over the past 12 months, up about 6% year over year, according to the Treasury Department. Total federal spending will total about $7 trillion in 2024.
The easiest path forward for defense contractors, according to Callan, would be a Harris presidency with Republican control of the Senate and Democratic control of the House. But almost any split scenario, including a Trump presidency with a Democratic House, should be a positive for contractors. A Democratic sweep would carry risks ranging from penalties for stock buybacks and lower defense sales to the Middle East.
Given that volatility likely lies ahead for the sector, it makes sense to know what Wall Street expects and how it might react to various scenarios.
Callan doesn't have published ratings on individual stocks. Wall Street's favorite large defense-contractor stocks are General Dynamics and L3Harris Technologies. More than 65% of analysts covering those two companies rate the shares at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%.
Among smaller-capitalization defense companies, Wall Street prefers BWX Technologies, Leonardo, and AeroVironment. BWX makes and services nuclear components for the Navy, while Leonardo supplies defense electronics. AeroVironment makes small unmanned aircraft including guidable munitions.
About 73% of analysts covering BWX stock rate shares at Buy. The Buy-rating ratios for Leonardo and AeroVironment are 63% and 86%, respectively.
Those are Wall Street's favorite defense bets no matter what happens on Tuesday.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 05, 2024 03:00 ET (08:00 GMT)
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