Defense Stocks: Avoid This Industry In 2012

| January 30, 2012 | 0 Comments

The past decade was very kind to the US aerospace and defense industry.

Government spending on national defense increased dramatically after 9/11 to fight the war on terror.  And it increased even more as the decade wore on to support the wars in Afghanistan and Iraq.

According to the Department of Defense (DOD), base military spending was $297 million in 2001.  But by 2010, base spending had increased to $528 million.

That’s a hefty 77% increase.

And thanks to the spending boom, defense stocks have performed very well.  Take a look at the following list of defense company stocks.  It shows just how they’ve done since the market bottom of March 2000.

  • Lockheed Martin (LMT) is up 365%
  • General Dynamics (GD) is up 258%
  • Northrop Grumman (NOC) is up 149%
  • And, Boeing (BA) has increased by 123%

No doubt about it, if you had added one or more of these names to your portfolio in March 2000, you’re sitting on some big gains right now.

But the defense stock boom could be coming to an end.

Last week, Defense Secretary Leon Panetta announced sweeping cuts in defense spending for fiscal 2013.  He’s asking for a stunning $33 billion less than Congress approved for 2012.

And this is just the beginning.

Earlier this month, Congress missed the Budget Control Act’s (BCA) deadline for imposing deficit reduction measures.  The BCA was passed last August to secure the votes needed to raise the debt-ceiling.  By missing the deadline, Congress has triggered over $1 trillion in automatic, across the board spending cuts.

The Defense Department’s share of the cuts is a whopping $487 billion over the next decade.  In other words, the DOD will have to chop nearly half a trillion dollars in spending over the next ten years.

Clearly, it’s an ominous sign for defense firms.

The DOD’s proposed budget incorporates a wide range of spending cuts. The Navy will have to slow construction of new ships.  The Air Force is looking at eliminating several tactical air squadrons.  And both the Army and Marines are facing severe cuts in manpower.

According to Lockheed Martin CEO, Bob Stevens, “the impact on the industry would be devastating.”

And the impending cuts come at a time when defense firms are already starting to struggle.

Last week, LMT said fourth quarter earnings plunged 29% due to lower government spending.  The company also issued a lower profit forecast for 2012 than analysts were expecting.

General Dynamics said they suffered a similar fate in the final quarter of 2011.  Their profit fell by more than 17%.  And they too guided earnings estimates for 2012 below analysts’ estimates.

The 2012 outlook for defense firms is dim at best.  And the bearish forecast will likely weigh on shares of defense companies over the year ahead.  Now is clearly not the time to add defense stocks to your portfolio.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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