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Two of America's biggest defense contractors turned their earnings in this past week and the results were... mixed.
Raytheon Technologies Corp. (NYSE: RTN) reported a solid beat on earnings per share, and the stock went up, but Lockheed Martin Corp. (NYSE: LMT) took a beating for missing on earnings expectations - a heckuva way for investors to treat the company that just this past Wednesday replaced Boeing Co. (NYSE: BA) as the world's biggest aerospace and defense operation.
But the common thread here is both companies' extremely iffy forward guidance on aircraft and equipment sales; forecasts were much lower than expected, and that's kept interest pretty tepid.
That's going to be the key to unlocking some profits on a trade that I think Wall Street just isn't looking for right now...
Defense Is Still as Safe a Bet as You Can Make
I don't understand why Wall Street is skittish about this sector. But I don't need to understand why in order to walk in and take the money they're leaving on the table.
Pandemic or not, Democratic Congress or Republican, the United States still shells out more on defense than the next 10 countries - from rivals to outright enemies to friends to NATO allies - combined. That's $732 billion the U.S. spent alone compared to $726 billion those other 10 countries spent - combined.
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Job creation, "re-shoring" manufacturing, and pandemic and economic recovery are at the top of Biden's long to-do list, so I can't see the defense budget taking much of a hit at all. The defense sector employs around 1.5% of America's entire workforce, something like 2.2 million people - and that doesn't include 1.3 million active duty military personnel. That's not a boat a politician is likely to rock right now.
Republican administrations are famous for talking tough and spending more than Democratic ones, but even Democratic administrations spend a lot. To put it another way, the smallest outlay of the Obama years in fiscal 2015 was still close to $600 billion.
Of the two top contenders here, Lockheed Martin and Raytheon, I think Raytheon is the better speculative bet. It's had further to fall than Lockheed, and it stands to gain much, much more.
Raytheon slashed around 28,000 jobs over the course of 2020, largely in its Pratt & Whitney aircraft engine business and Collins Aerospace divisions. This past fall, Raytheon execs said the company was aiming to hold onto $4 billion in cash reserves; CEO Greg Hayes said internal analysts were projecting it might be as late as 2023 before aviation returned to 2019 levels. But - and this is a big "but" - these moves were made months before there were any available COVID-19 vaccines at all.
The bet here is that pent-up demand for aircraft and aircraft parts will rebound far faster than the "pre-vaccine" projections. I think we can look for that coiled spring to unwind in the second half of this year.
And because this is speculative, the way to play it is with - you guessed it - options. My proprietary S.C.A.N. system is pointing right at RTX Mar 19, 2021 $75 calls (RTX210319C00075000). You can buy them for less than $1 right now, and, frankly, they'd be a great buy up to $1.25 a share. Would I buy an $82 stock for $75? Absolutely.
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About the Author
Andrew Keene is a globally known trader and a renowned expert on all things options.