Defense Sector ETF (NYSE: ITA) has outperformed the S&P 500 by 6% YTD and has risen nearly 24.84% as of 6/21/2019. Boeing and United Technologies remain the two top weighted stocks accounting for 18.9% and 16.2% respectively. According to Koyfin.com, Boeing and Transdigm have accounted for 2.04% and 1.60% of positive return on the ITA ETF. The Defense ETF has performed despite a tough couple months surrounding Boeing’s 737 Max scandal, which was the result of two separate plane crashes in Indonesia and Africa.
Lockheed Martin shares are nearing all time highs as their F-35 program nears full rate production which should see full year production numbers of 91 jets for 2019. F-35 accounts for 25% of all company sales and will continue gaining a larger percentage of overall sales as the company expects the 5th generation fighter program to last beyond 2050. Lockheed Martin continues to see strength in Missiles and Fire control as dark programs, Hell-Fire and THADD ramp production for sales to foreign militaries. Nearly a third of sales are to (FMS) Foreign Military Sales to countries such as Saudi Arabia and EU countries.
United Technologies (NYSE: UTX) and Raytheon (NYSE: RTN) announced a merger in early June, which will create the largest defense contractor if approved by the US government. There are monopoly concerns in the Pentagon and (FTC) Federal Trade Commission, as there would be 3 primary military contractors of Northrop Grumman (NYSE: NOC), Lockheed Martin (NYSE: LMT) and the newly merged Raytheon/United Technology company. The new company will focus on jet engine production, missile/electronic guidance manufacturing and cyber warfare.
With the market reaching all time highs and Defense Stocks outperforming, it’s time to question when to take profits and hedge bets on stocks that will perform in a correction or down market. Defense stocks tend to trade sideways or down heading into an election year and with 2020 approaching rapidly, it seems the right time to lessen exposure to this industry. While I can’t dispute the financials of companies like Lockheed and Northrop, there just seems to be more downside risk than is upside potential at the moment.