We track hedge funds for two reasons: they have access to better information and better analysts than ordinary investors. When a large number of hedge funds are bullish about a stock, the consensus usually indicates that the stock has more than an even chance to outperform the market. In this article we are going to talk aboutaerospace/defense stocks that hedge funds love the most.
|Ticker||Company||No of HF|
|GD||General Dynamics Corp.||30|
|TDG||TransDigm Group Incorporated||28|
|HON||Honeywell International Inc.||25|
|LMT||Lockheed Martin Corporation||23|
|SPR||Spirit AeroSystems Holdings Inc||19|
|TGI||Triumph Group, Inc.||16|
Goodrich Corp (GR) is the most popular aerospace/defense stock among hedge funds tracked by us. There were 47 hedge funds with GR positions at the end of last year. Thomas Steyer’s Farallon Capital significantly boosted its GR stakes by 180% during the fourth quarter of 2011. The fund had $424 million invested in GR at the end of last year. James Dinan, Eric Mindich, and John Paulson were also bullish about GR. We have discussed GR in detail in our article about some good merger candidates, which we posted about a month ago. Since then, GR was up 0.68%, lower than the 2.68% for SPY. This is probably because the stock is trading near its merger price. It is currently priced at $126.32 per share and its offer price is $127.50. There is still about 0.93% upside and the merger transaction is expected to be completed at the end of June. The stock is a great alternative to Treasury bills.
Boeing Co (BA) is the second most popular aerospace stock among hedge funds. As of December 31, 2011, there were 33 hedge funds reported to own BA in their 13F portfolios. Ken Fisher was the most bullish money manager about BA. Fisher Asset Management had over $360 million invested in this stock at the end of last year. Steven Cohen’s SAC Capital Advisors also had $159 million invested in BA stocks and another $7.3 million invested in BA Calls.
BA is expected to make $4.52 per share in 2012 so its forward P/E ratio is about 16.6, slightly higher than the industry average of 14.4. There are several factors benefiting the stock. BA is expected to continue benefiting from the strong growth in emerging markets, such as Asia and Middle East. As of December 2011, the total backlog of Boeing is about 3770 aircrafts, mainly supported by the strong demand for narrow-body aircrafts in the emerging markets. BA’s business in US also looks promising. US airlines are taking deliveries in order to improve the fuel efficiency of aging fleets. Additionally, the FY2012 defense budget contains additional funds for 28 F/A-18s and BA recently won a $3.5 billion contract to produce KC-X refueling tanker for the Air Force. The total project is expected to be worth about $35 billion for producing 179 aircrafts. So, though BA’s forward P/E ratio is a bit higher than the industry average, it still looks attractive to us. Moreover, the company is actually trading below historical average valuation levels and it has a strong expected earnings growth of about 12% annually. Therefore, overall we agree with the hedge funds and we also recommend investors to buy BA.
One of the major competitors to BA is Lockheed Martin Corporation (LMT), which is also quite popular among hedge funds. Twenty-three hedge funds disclosed owning LMT at the end of last year, including Cliff Asness’ AQR Capital Management and Wallce Weitz’s Wallace R. Weitz & Co. LMT is expected to earn $7.86 in 2012 so its forward P/E ratio is about 11.5, lower than the 16.6 for BA. It also has a high dividend yield of 4.46%, versus 2.37% for BA. But why do hedge funds like BA more? We think it is probably because LMT’s growth potential is weaker. The major driver of LMT’s earnings is the growth in US defense spending. However, it seems very likely that the government will cut defense programs and increase the cost of new contracts as it tends to narrow budget deficits.
A few other aerospace/defense stocks that hedge funds love include General Dynamics Corp (GD), TransDigm Group Inc (TDG), and Honeywell International Inc (HON). At least 25 hedge funds reported owning these positions in their 13F portfolios at the end of last year. GD and HON look attractive. GD’s forward P/E ratio is 9.93, a large discount to the industry average of 14.4. HON’s forward P/E ratio is a bit higher (13.6) but it is also expected to grow at higher rates of 14.5% per year. We are not very bullish about TDG though. Its high earnings growth expectation of above 20% is already reflected in its valuation. Its forward P/E ratio is about 20. As contrarian investors, we think GD and HON are safer choices.