Defense stocks on offense

Defense and aerospace stocks have done well this year amid anticipation of increased US defense spending. In mid-November, though, Congress passed a defense budget of $700 billion that far outstripped the White House’s proposal of $603 billion.1 The bill was signed into law on last Tuesday, and among its earmarked projects is additional funding of missile defense programs targeting North Korea’s nuclear threat.

Missile Systems is one of the specialized divisions within Raytheon (RTN), whose stock has roughly doubled since July 2015 to around $190. Among the missile contracts Raytheon has recently landed is a $300 million contract that will supply weapons and support to Saudi Arabia.2 The company has had only two negative earnings surprises (Q4 2016 and Q4 2014) in the past seven years,3 and the average 12-month analyst target price is around $200.4

To boot, some analysts have argued that RTN’s stock price hasn’t fully factored in the benefits of a lower corporate tax rate.5  Heard much about tax reform lately?

Raytheon (RTN), 3/21/17 – 12/18/17

Source: OptionsHouse

Since late October RTN has formed a consolidation pattern chart analysts would likely label an ascending triangle: a series of higher lows (suggesting bullish pressure) paired with a series of roughly equivalent highs that define the resistance level price is attempting to penetrate. Since hitting a new all-time high and tanking more than 3% on October 26 (its most recent earning release date), the stock has twice pushed to slightly higher ground, only to be turned back by sharp down moves—most recently yesterday. Launch aborted?

Maybe not. If the recent price action follows the general pattern of the previous examples, RTN could face a few more days of tepid-to-bearish price action before reverting to the upside. In this case, though, the lower boundary of the triangle is now close enough to provide a nearby test point on the downside: If the current pattern of higher lows is to remain intact—and the upside-breakout scenario remain viable—the stock shouldn’t trade too far below this line, or remain below it too long. (Notice the stock did close below it on December 5, but reversed the next day to close above it.)

Raytheon (RTN), 10/4/17 – 12/18/17

Source: OptionsHouse

Keep in mind, though, that chart pattern support and resistance lines such as these are subjective—they don’t represent precise, critical price levels. It’s what they imply—in this case, evidence of continued upside pressure, until proven otherwise—that counts.

Finally, one wild card in the bullish-stock scenario is the political reality facing the recently passed defense bill. Right now, for example, annual defense spending is capped at $549 billion, a limit that would have to be raised to accommodate the proposed budget.6 It’s one thing to come up with a budget, it’s quite another to come up with the funds to make it a reality.


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1 Senate sends budget-busting defense bill to Trump. 11/16/2017.

2 Raytheon Arm Wins $302M Deal to Boost Saudi Arabia's Defense. 12/13/17.

3 Raytheon Co. (RTN) Earnings. 10/26/17.

4 American Banking and Market News. Raytheon Company (RTN) Receives Average Rating of “Buy” from Analysts. 12/11/17.

5 UBS: Expect swift market rally if tax bill passes and Target, Raytheon to lead. 12/15/17.

6 The Hill. Trump faces hurdles to military build-up. 12/17/17.