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Trump Likely to Raise 2020 Defense Budget: 5 Great Picks

Even as markets continued to experience volatile trading on Dec 10, aerospace and defense stocks were staging a midday rally. Gains for the sectors were fueled by a report that President Trump has asked the Pentagon to raise its budget proposal for fiscal 2020. This is a complete turnaround from Trump’s recent commitment to reduce defense spending in line with cuts planned at other federal agencies.

U.S. companies ended up at the summit of the top 100 defense companies in the world in terms of sales in 2017, per a fresh study. Another factor boosting the defense sector at this point is a divided Congress. While the Trump administration is intent on boosting defense spending, Democrats have agreed to the defense budget for fiscal year 2019. Taking these factors into account, it makes sense to bet on defense stocks at this time.

Defense Stocks Surge, Trump Proposes Budget Hike

U.S. stocks endured a particularly volatile Monday with the Dow recovering from a 500-point drop at the end of the session. Ultimately, markets finished in the green because of a tech stock rebound. But even when markets were moving lower early in the session, defense stocks were notching up gains.

Shares of Raytheon RTN, Lockheed Martin LMT and Northrop Grumman NOC gained 3.7%, 4.6% and 4.9%, respectively. General Dynamics GD increased 2.9% even as Boeing BA recovered to gain 1%.

The immediate trigger for these gains was a report by Politico per which President Trump has asked Defense Secretary James Mattis to present a $750 billion defense budget proposal for 2020. This is significantly higher than the $733 billion proposal which the Pentagon has been fighting for to date.

This also represents a complete turnaround for Trump, who has gone on record to describe the 2019 budget as “crazy.” The President has even vowed to cut defense spending by around 5%, in line with proposed cost cuts at other federal agencies.

Apparently, Trump believes that an inflated proposal will act as a “negotiating tactic,” ensuring that the Democrats fail to push the final budget below the Pentagon’s initial target of $733 billion.

Divided Congress a Boon, US Companies Top Charts

Mid-term results have delivered a divided Congress with Democrats firmly in control of the House of Representatives. However, earlier this year, House and Senate Democrats voted overwhelmingly for the $716 billion defense budget for 2019. This means that defense stocks will not be harmed by the current gridlock in Washington since Democrats are unlikely to derail defense spending.

Meanwhile, U.S. companies continued their dominance of the defense industry, per a fresh report from the Stockholm International Peace Research Institute (SIPRI). According to the study, 42 U.S. companies were part of the top 100 largest defense companies in the world in terms of sales in 2017. Arms sales by U.S. companies increased 2% during this period, accounting for 57% of the top 100 arms sales.

Our Choices

Despite earlier promises to cut defense spending, Trump is likely to support a higher Pentagon budget for 2020. Also, Democrats are unlikely to derail 2019’s increase in defense spending despite gaining control of the House after recent mid-term polls.

Additionally, U.S. defense companies continued to dominate global arms sales, per fresh figures. Adding defense stocks to your portfolios looks like a smart move. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

AeroVironment, Inc. AVAV designs, develops, produces, operates a portfolio of products and services for government agencies, businesses and consumers.

AeroVironment has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 42.8% for the current year. The Zacks Consensus Estimate for current-year earnings has increased 17.1% over the last 30 days.

Teledyne Technologies Incorporated TDY is a provider of digital imaging, instrumentation, defense and aerospace electronics and engineered systems.

Teledyne Technologies sports a Zacks Rank #1. The company has expected earnings growth of 36.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 6.1% over the last 30 days.

Aerojet Rocketdyne Holdings, Inc. AJRD focuses on developing military, civil and commercial systems and components for the aerospace and defense industry markets.

Aerojet Rocketdyne’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 43.3% over the last 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Curtiss-Wright Corporation CW is a diversified multinational company that designs, manufactures and overhauls precision components.

Curtiss-Wright has a Zacks Rank #2 (Buy). The company has expected earnings growth of 23.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days.

Raytheon Company is one of the largest aerospace and defense companies in the United States.

Raytheon has a Zacks Rank #2. The company has expected earnings growth of 32.6% for the current year. The Zacks Consensus Estimate for current-year earnings has moved up1.7% over the last 60 days.

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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report

General Dynamics Corporation (GD) : Free Stock Analysis Report

Lockheed Martin Corporation (LMT) : Free Stock Analysis Report

The Boeing Company (BA) : Free Stock Analysis Report

Aerojet Rocketdyne Holdings, Inc. (AJRD) : Free Stock Analysis Report

AeroVironment, Inc. (AVAV) : Free Stock Analysis Report

Curtiss-Wright Corporation (CW) : Free Stock Analysis Report

Raytheon Company (RTN) : Free Stock Analysis Report

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