Question:
With the possibilities of defense cuts, what are your opinions of Northrop Grumman Corporation (NYSE: NOC) and defense stocks in general? Also, what sector(s) do you like after the recent market drops?
Answer:
Northrop Grumman is a defense contractor that we own in our Traditional Portfolio. Of course, with the debt ceiling increase, there is a possibility that part of the $1.3 trillion in budget cuts—possibly up to half—could come from defense spending. It is definitely a dark cloud over defense contractors.
However, we have been here previously. The United States understands the need to maintain a strong military, and Northrop Grumman is one of the premiere contactors. The stock is cheap currently, considering the company has some long-term contracts that are high earners for the company. If you own Northrop Grumman, it should be good to hold. If you do not own it, you may consider buying shares.
If the defense contractors were hit with defense cuts, we feel Northrop Grumman would be one of the companies that would survive by finding alternative revenues. We like the stock as the company has provided good guidance, and the stock is cheap, trading at seven times earnings. It also pays a dividend of 4%.
As far as other sectors, we are overweight in Consumer Staples. Our initial reason was because these companies have an easier time passing along higher prices to consumers. It is a defensive sector that should hold up well in the current environment. Additionally, they are cheap, and generally pay a good dividend. In that sector, we like names, such as, Kimberly-Clark Corp. (NYSE: KMB), Church & Dwight Co., Inc. (NYSE: CHD), The Procter & Gamble Company (NYSE: PG), PepsiCo, Inc. (NYSE: PEP) and even The Coca-Cola Company (NYSE: KO). Information Technology has also acted as a good defensive play, with names like Apple Inc. (NASDAQ: AAPL) and Oracle Corp. (NASDAQ: ORCL).
We are slightly underweight in Consumer Discretionary as commodity costs have affected them. With the nature of their businesses, they have a tough time controlling costs. They cannot pass along higher prices to consumers, as easily as some other sectors.
Given the recent sell-off, there really is not a lot we would avoid. We consider a universe of 700 stocks, and about 300 of those are trading for a PEG ratio below 1. More than 400 stocks in our universe offer a dividend yield near 3%. We have seen the recent sell-off create some good values in the market.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
