PPA: Defense Stocks ETF Positioned To Soar

seekingalpha11-21 18:59

Invesco Aerospace & Defense ETF benefits from increased demand for defense products amid escalating conflicts in Ukraine and the Middle East, and potential support from a Trump administration.Top ...

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The most important factors that influence my opinion of the ETF are the enhanced need for weapons under the current geopolitical environment, the impact of an incoming Republican administration, and forward prospects of the top 10 companies within the ETF. On November 19, Russia announced they have a right to use nuclear weapons to defend themselves against any country attacking it. This came after the US approved the use of long-range missiles for Ukraine, which struck targets in Russia. This event has escalated the war in Ukraine, increasing the demand for weapons from defense companies such as RTX (formerly Raytheon), Lockheed Martin (LMT), Northrop Grumman (NOC) and other holdings within the ETF. Further increasing demand is the war in the Middle East, where Israel is seeking additional support. In both cases, the U.S. is willing to supply weapons made by U.S. manufacturers. With the election of Donald Trump as President, the U.S. is entering a period where defense stocks typically rise as Republicans favor increased spending on defense. Although Trump verbally says he doesn't want a war, he also has a history of being ready to strike when the need is high. On the aerospace front, Elon Musk is advocating for deregulation and funding of space projects. After campaigning for Donald Trump, it has become clear that Trump plans to help Musk on the space race to Mars and wants to win. Elon Musk's private company SpaceX has become a leader in aerospace; however, NASA awards contracts to multiple companies involved in a space project, including many of the companies in this ETF. Within the top ten holdings of Invesco's Aerospace and Defense ETF, each company is a leader and has upside based on current geopolitical risk and support for space initiatives, which are also considered part of U.S. defense initiatives. Seeking Alpha Quant rates PPA a Buy 4.30 (as of 11/20), which supports my rating. Note the momentum section rated A+. Seeking Alpha Quant (PPA) Invesco Aerospace & Defense ETF - Large Well-Established Companies According to Invesco's website, the PPA fund is based on the SPADE™ Defense Index, normally investing at least 90% of total assets in common stocks within the index. The index is focused on companies that are involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace. PPA pays a quarterly dividend of $0.65, which has a forward dividend yield of 0.56%, and a total expense ratio of 0.57%. The top 10 holdings account for 55.5% of the ETF. A quick glance at the companies shows they are all large, well-established companies that have been in business for a long time. They all have government contracts lasting for years, which can progress over multiple President's terms. Invesco Website 11/19/24 Russia Threatens Nuclear Warfare On November 19, Vladimir Putin signed a decree revising Russia's nuclear doctrine, creating a justification for the use of nuclear weapons by the Russian Federation and its allies. This action was prompted by the U.S. approving Ukraine's use of long-range missiles to strike into Russian territory, primarily at military targets, to help weaken the Russian army. The public relations event was meant to warn western countries that if they get involved by helping Ukraine, there would be consequences including nuclear and non-nuclear retaliation including drone strikes. According to Russian Foreign Minister Sergey Lavrov \"This is a signal that they want escalation,\" in response to the missile attack, highlighting it as a new phase of the war. Putin further stated that missiles like these could only be fired with U.S. satellite and military instructor assistance, prompting the statement: If this decision is made, then it will mean nothing less than the direct participation of NATO countries-the U.S., European states-in the war in Ukraine. And that will substantively change the very essence, the very nature, of the conflict. It will mean NATO countries are fighting against Russia. Ukraine carried out its first missile strikes using Army Tactical Missile System (ATACMS) made by Lockheed Martin, on November 19. Ukraine has been asking for these US supplied weapons for a long time. They allow Ukraine to go beyond local fighting into Russian territory to destroy high-value targets. Aerospace Wins in a Trump Presidency As it turns out, President-elect Donald Trump is interested in space, which is great for the industry and Elon Musk. On November 19, Trump attended a SpaceX test flight of its Starship vehicle in South Texas. As Musk progresses his plan to land humans on Mars, he needs allies in government to fund the work. Trump has agreed to reduce regulations, such as rocket launches overseen by the Federal Aviation Administration (FAA), in order to accelerate progress toward ambitious space goals. Elon Musk campaigned with Trump, serving not only as a celebrity speaker but a heavy donor. As a reward, Musk will be leading a new department called the Department of Government Efficiency, which will recommend federal spending cuts. One of the reasons Musk decided to support Trump is having an ally in reducing aerospace overregulation. Based on my experience in following the aerospace industry, it's important to have a U.S. President that supports the initiatives in general, or they have a constant threat of being derailed with spending cuts. Defense and aerospace companies are tied together because most projects require input from multiple companies. For example, NASA may approve one company to produce an engine and another to produce a lander. Defense & Aerospace Companies Outperform Over the past 10 years, PPA has outperformed the S&P500 Index. Data by YCharts Valuations of Top 10 Holdings PPA is really an index fund of the top defense and aerospace companies. Within the top 10, 3 of the companies are rated a \"Strong Buy\" by Seeking Alpha Quant. The weakest one of the group is Boeing (BA), which has recently gone through some exceedingly difficult times, including quality issues with airplanes, a labor union strike, and a change in CEO. However, according to Seeking Alpha Analyst Dhierin Bechai, an Aerospace Engineer, Boeing has started its turnaround and rates it a Buy. Other than Boeing, the other stocks have extraordinarily strong metrics in my view. For example, almost all of the stocks have a double-digit Return on Equity (ROE). Lockheed Martin (LMT) has an attractive 81.04% ROE, which means it is a good investment and management is running the company well. In my opinion, Lockheed is one of the best run companies in the U.S. employing military veterans and producing outstanding innovative products that keep the U.S. ahead of the competition. Earnings per share growth is another strength within the group. Note General Electric (GE) with a forward EPS growth of 26.24%, Axon (AXON) with 41.37% growth, and Howmet Aerospace (HWM) at 31.52%. Seeking Alpha PPA PPA Outperforms Close Peers When comparing PPA to peers, the fund stands out for having greater diversification with 56 holdings vs. an average of 30. iShares U.S. Aerospace & Defense ETF (ITA) is the largest by assets under management (AUM) and has a stronger concentration in the top 10 stocks, accounting for 76% of the fund. The other ETFs have approximately 50% of the fund in the top 10 stocks. Turnover amongst the ETFs is low (around 20%), with SPDR S&P Aerospace & Defense ETF (XAR) being the highest at 36%. SPDR S&P Kensho (ROKT) is unusual in the group because its #1 holding is Rocket Lab (RKLB) accounting for 14.41% of the fund. Seeking Alpha Peers to PPA PPA outperforms peers on a 10-year total return basis, doubling in value. Data by YCharts Outlook The defense and aerospace industry has an incredibly strong momentum, in my view. There are two significant wars going on which have recently escalated. In the Middle East, the U.S. is allied with Israel in a war against Hamas that doesn't seem as if it's going to end any time soon. In fact, recent fighting with Iran could escalate the war to include other countries. In Ukraine, the war has escalated with the U.S. approving long-range missiles including ATACMS, and as of November 20, included Cruise Missiles. President Biden also announced the U.S. would supply Ukraine with anti-personnel mines. These wars create the need to produce more weapons to give to allies such as Ukraine, as well as the need to ensure the U.S. has enough defense to step in and fight if it comes to that. On the aerospace front, the U.S. is continuing the Artemis project, with plans to land humans back on the Moon. President Trump has expressed an interest in space, with direct conversations with one of his largest backers, Elon Musk. Both events point to stronger commitment by the U.S. to spend on space initiatives, fighting harder to win the space race to colonize the Moon and Mars. Risks To Rating The largest risk within the portfolio comes from owning Boeing, in my opinion. While many analysts suggest the worst is over, Boeing has continued to show weakness and surprise news events taking the stock down. While we could assume Boeing's troubles are being solved, it may take a long time to play out. The other risks to the rating are that the wars get resolved, reducing demand for weapons and or the newly founded Department of Governmental Efficiency (DOGE) decides to cut spending on defense and aerospace. With Elon Musk leading the initiative, it's unlikely that space spending will be cut, in my view. Bottom Line  I rate PPA a Buy due to the current momentum in the defense and aerospace industries. Invesco's ETF is an index fund of large, well-established companies with governmental contracts that span years. Under the current scenarios of escalating wars and heightened interest in space, these companies stand to benefit from funding from the new Trump administration.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485466912"}