Cracks in the economy have been popping up recently, from the inverted yield curve, to the economic impact of the trade war, to softening in the labor market among others in a growing list of recessionary indicators.
But with a possible recession approaching, Goldman says there’s one group of stocks with a good track record in the kind of precarious environment we’re in now: aerospace and defense businesses.
“During the past 10 years, Aerospace & Defense has been least sensitive to US and global economic growth across Industrials subsectors,” Kostin said, noting that these stocks tend to outperform the S&P 500 when the economy narrowly avoids a recession.
What’s more, Kostin says these stocks have the added benefit of “the lowest exposure to Asia Pacific,” a key selling point given the ongoing trade war between the U.S. and China.
Kostin pointed to the unexpected decline in the ISM manufacturing index, which fell below 50 last month for the first time in three years, indicating a contraction.
While some have raised concerns about this contraction, Kostin says the index is “an inconsistent predictor of US recessions.” Kostin went on to note that when recessions don’t occur following the ISM falling below 50, aerospace and defense stocks have outperformed the S&P 500 in the following six months.
In other words, when economic conditions deteriorate but the economy ultimately doesn’t fall into a recession, the stock market typically performs well while defense-type stocks outperform the broader market.
According to Goldman, the S&P 500 has historically gained 22% in the six months following a contraction in the ISM when a recession doesn’t occur, and aerospace and defense stocks typically gain an additional 2.5% more in the same timeframe.
Goldman Sachs analyst Noah Poponak recently reinitiated coverage of and boosted his price target for TransDigm from $547 to $623, indicating possible upside 24% over the next twelve months. Poponak cited significant recurring revenue, consistent and high margins, as well as strong cash generation and deployment.
Cowen analyst Gautam Khanna reiterated his Buy rating on Huntington Ingalls following its earnings report in August and issued a price target for the stock of $250 – 13% higher than the current price. “HII appears close to a shipbuilding margin uptick, and investor sentiment is awful, factors that keep us interested in this transitioning story,” Khanna said.
As for Northrop Grumman, Goldman isn’t the only firm bullish on one of the world’s biggest weapons manufacturers and military technology providers. Morgan Stanley analyst Rajeev Lalwani upgraded NOC to a Buy, calling it the “best long-cycle play.
Lalwani boosted his price target for Northrop Grumman from $335 to $418, indicating potential upside of 16% over the next twelve months, citing “growing sales visibility through the mid-2020s from a two-year budget deal pairs well with [validation] amid uncertainty.”
And according the Morgan Stanley analyst, Northrop is “the best way to play the long-term strategic priorities of the U.S. government” which could accelerate the company’s profit margins and sales growth.
“We believe NOC is well positioned given its longer duration capability and high-end technology focus, inflecting revenue and margins, portfolio shaping potential (via Technology Services), and an easing investment cycle that supports one of the highest FCF yields come 2021 at ~8%,” Lalwani said.