The Four Key Areas Propelling This Defense Stock Higher

Michael A. Robinson

When we spoke on Dec. 26, I suggested you invest in United Technologies Corp. (NYSE: UTX).

At the time, I noted the sprawling defense and industrials firm had completed a $23 billion buyout of aerospace supplier Rockwell Collins.

I went on to say that United Technologies provides access to a very lucrative field of investing – corporate spin-offs. This one gives shareholders access to three separate stocks.

But today I'm writing to let you know I now have placed the stock on hold. Rest assured this was not an easy decision.

After all, I still believe in the company's long-term growth.

It's the short term that is the problem, now that the firm has announced an all-stock deal to merge with Raytheon Co. (NYSE: RTN) to create a defense giant with $74 billion in sales.

So today I'm going to walk you through the reasons I have the stock on hold.

And I'll also show you a lucrative defense pick that is putting the market to complete shame…

Why Long-haul Spin-offs Can Pay

If you have followed along with me for any length of time, then you know I'm a big fan of corporate spin-offs. Slimming down a big company often greatly improves efficiencies and profit margins.

It's also good for shareholders. Two professors at Penn State University examined 30 years of market data covering 174 spin-offs.

Their study revealed that in the first three years of operations, these new companies showed price appreciations of 76%, beating the S&P 500 by 31%.

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That's backed up by Lehman Bros., which studied 85 spin-offs between 2000 and 2005. The firm found that they beat the S&P 500 by as much as 45% in their first two years as independent companies.

In the case of UTX, investors get access to three stocks for the price of one. After it completed the merger with Rockwell Collins last November, United Technologies said it would spin off its Otis elevator and Carrier building systems units into separate firms.

Otis has more than $12 billion in yearly sales, much of that in the form of recurring revenues. It produces more than $2 billion in adjusted earnings each year.

And the Carrier segment is a global leader in heating, ventilation, and air-conditioning (HVAC). It has around $18 billion in yearly sales and is quite profitable. Last year, it brought in roughly $3.5 billion in adjusted earnings.

So, I'm still a big believer in the value of the spin-off. I think it will pay off well… over the long haul.

Short-term Issues

But the company's decision to merge with Raytheon casts too much short-term doubt on the stock.

Before I go into those details, let me explain what I mean by a "hold" on UTX.

Literally, I'm saying that if you own it already, I would not sell unless for some reason it triggers your protective stop. The main thing is not to wade in now, no matter what you hear from Wall Street.

I have three main reasons for saying this:

1. The complex move to bulk up and spin off at the same time could distract management until it's all complete in the first half of next year.
2. President Trump has already voiced concerns that the combined firm might limit competition at a time when Capitol Hill also is worried about corporate size.
3. Activist investor Bill Ackman has come out strongly against the deal. His Pershing Square Capital Management hedge fund owns more than $700 million in UTX stock and is likely to seek help from other investors in trying to block the deal.

If I had to guess, based on what I know about the defense industry and the need to deliver more platforms with greater efficiency, I'd say the merger will ultimately go through.

However, UTX is asking investors to wait at least six months and maybe a year before we know how all this shakes out.

That's a long time for shareholders to circle the wagons. And there's no reason to do that.

Not when we can instead put our hard-earned money into this stock.

This Defense Stock Is on the Cutting Edge of Tech

Michael A. Robinson

About the Author

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Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.

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