Billionaires Showing Increased Interest in Aerospace & Defense Stocks

Over the past several decades, stocks from the aerospace and defense sector have proven to be among the safest bets for investors during times of economic uncertainty. Regardless of whether it is a bear market or a range-bound one, a portfolio that has high exposure to the aerospace and defense industry usually ends up outperforming the benchmark because stocks from that space are generally less volatile and pay reasonable dividends. The credibility of that maxim has been proven again in 2016. While the benchmark S&P 500 Index has returned only 3.16% so far this year, the S&P Aerospace & Defense Select Industry Index has appreciated by 7.61% (excluding dividends) during the same period.

The difference in the performance of those two respective indices was much wider during the second quarter, which interestingly was also the period when we saw several of the billionaire investors in our database becoming increasingly bullish on the aerospace and defense industry. In this article, we’ll reveal the names of five stocks from the industry which enjoyed a significant increase in their popularity among the billionaire investors tracked by Insider Monkey and discuss how those stocks have performed this year.

At Insider Monkey, we track around 750 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

Defense Stocks UTX GD LMT carriers, aircraft, nuclear, prowler, warfare

Everett Historical / shutterstock.com

#5 Orbital ATK Inc (NYSE:OA)

— Number of Billionaires With Shares (as of June 30): 7

— Total Value of Billionaires’ Holdings (as of June 30): $226.61 million

Let’s start with Orbital ATK Inc (NYSE:OA), the ownership of which rose by three among the billionaire investors tracked by us during the second quarter, while the aggregate value of their holdings in it increased by $115.8 million. The Virginia-based company recently lost over 20% of its market capitalization during a single day last month after it reported its preliminary second quarter results and revealed an accounting issue with a contract that it won in 2012. Owing largely to that drop, Orbital ATK Inc (NYSE:OA)’s stock is currently trading down by 17% year-to-date. According to several analysts, despite the lower revenue guidance provided by the company with its most recent quarterly results and the accounting issues that it is dealing with, Orbital ATK’s stock is a bargain at current levels. On September 1, analysts at Deutsche Bank initiated coverage on the stock with a ‘Buy’ rating and $100 price target, which represents potential upside of 32.8%.

Follow Northrop Grumman Innovation Systems Inc. (NYSE:OA)

#4 Lockheed Martin Corporation (NYSE:LMT)

— Number of Billionaires With Shares (as of June 30): 7

— Total Value of Billionaires’ Holdings (as of June 30): $466.06 million

The number of billionaire investors tracked by us that were long Lockheed Martin Corporation (NYSE:LMT) increased by four during the second quarter, with the aggregate value of their holdings in it jumping by 144%. Shares of the aerospace and security company recently made their lifetime high at $266.93. Though the stock has fallen considerably from that level in the past few weeks, it is still trading up by 8.32% year-to-date. Lockheed Martin Corporation (NYSE:LMT) currently pays a quarterly dividend of $1.65 per share, which translates into a respectable annual dividend yield of 2.77%. Though Lockheed Martin’s stock has appreciated by 232% in the past five years, a number of analysts think that it is still undervalued on a free cash flow basis. Some analysts are also of the opinion that after having sold its government IT business, the company can now renew its focus on increasing production volume in other, more profitable business segments, which will translate well for its stock going forward.

Follow Lockheed Martin Corp (NYSE:LMT)

On the next page, we’ll run through three more stocks from the aerospace and defense industry that billionaires were buying in the second quarter.

#3 Raytheon Company (NYSE:RTN)

— Number of Billionaires With Shares (as of June 30): 10

— Total Value of Billionaires’ Holdings (as of June 30): $548.14 million

Raytheon Company (NYSE:RTN) is the only stock in this article which had an increase in billionaire ownership during the second quarter (by three), despite the aggregate value of their holdings in the stock declining during that time (by 32%). One of the hedge funds that lowered its stake in the company significantly during the second quarter was billionaire Jim Simons‘ Renaissance Technologies, which cut its position by 91% to 92,200 shares. Raytheon Company (NYSE:RTN)’s stock also made its lifetime high last month, at $143.39, but has corrected since then and now trades with year-to-date gains of 8.23%. The Massachusetts-based defense technology company is expected to report its third quarter results at the end of next month and the current consensus estimate of analysts is for it to report EPS of $1.66 on revenue of $6.04 billion. For the same quarter of the previous year, Raytheon Company pulled in EPS of $1.47 on revenue of $5.78 billion.

Follow Raytheon Co (NYSE:RTN)

#2 Northrop Grumman Corporation (NYSE:NOC)

— Number of Billionaires With Shares (as of June 30): 10

— Total Value of Billionaires’ Holdings (as of June 30): $1.52 billion

Moving on, the number of billionaire investors that we track with long positions in Northrop Grumman Corporation (NYSE:NOC) doubled during the second quarter and the aggregate value of their holdings in it rose by $230 million. Shares of Northrop Grumman Corporation (NYSE:NOC) have returned over 300% in the last five years and are currently trading up by over 10% in 2016. Despite such a stellar rally in the stock, it still sports a reasonable annual dividend yield of 1.72% based on its last trading price. For its most recent quarter, the company reported better-than-expected numbers, but that wasn’t enough to impress a few analysts, who are of the mind that after such a prolonged rally, the stock has become overvalued. On August 25, analysts at JPMorgan downgraded Northrop Grumman to ‘Neutral’ from ‘Overweight’, but upped their price target on it to $231 from $225.

#1 General Dynamics Corporation (NYSE:GD)

— Number of Billionaires With Shares (as of June 30): 11

— Total Value of Billionaires’ Holdings (as of June 30): $1.02 billion

General Dynamics Corporation (NYSE:GD) continued to remain the favorite aerospace and defense stock of the billionaire investors tracked by Insider Monkey at the end of June, as a net total of two billionaires added it to their portfolios during the second quarter, alongside the aggregate value of their holdings in it rising by 32.5%. Billionaires that initiated a stake in the company during the second quarter included Dan Loeb (Third Point) and Bruce Kovner (Caxton Associates LP). General Dynamics Corporation (NYSE:GD)’s stock also made its lifetime high recently, like several of its peers, and is currently trading up by almost 8% for the year. Most analysts who track General Dynamics Corporation (NYSE:GD) are bullish on it, citing the company’s strong balance sheet and its relatively low valuation when compared to its peers. The stock currently sports an average rating of ‘Overweight’ and an average price target of $167.67 from the 18 leading analysts and research firms on Wall Street who track it.

Follow General Dynamics Corp (NYSE:GD)

Disclosure: None