Lockheed Martin (LMT)

He expects to hear about an increase in US military spending in tomorrow night’s speech. They will benefit from the border tax.

This is all about defence. Mr. Trump had the tweet on the F 35 that knocked about $15 off the stock, and this is a great chance to buy in. This is going to be a favourite of the new Defence Secretary Mattis. They have all the right programs, especially the missile programs. Expects announcements in the order of $40-$50 billion in new spending this March, which a lot will be on military readiness. Not a cheap stock, but a great secular story and you should be in this name for multiple years. Dividend yield of 2.82%. (Analysts’ price target is $281.32.)

The chart looks really good.

It has much more of its business in the defense contractor space, vs. BA-N that has more or an aerospace component in it. 8-9% growth rate, so it is rather expensive compared to the rest of its peers. He prefers GD-N. Technically LMT-N looks good, but wait before buying.

(Top Pick Nov 25/14, Up 20.23%) He felt we were near a secular trough in defense spending and that it would pick up. He also liked it because it was domestically focused. This group continues to behave well. He would continue to buy it.

An expensive stock. Trading well above where it normally has traded. Just bought Sikorsky. Fairly high debt levels at about 70% of capital. Also, have the F 35 program, which has been mired in controversy. In the end, it may turn out to be a real cash cow for them. At this point he would probably pass.

Lockheed Martin (LMT-N) or United Technology (UTX-N). This is really about defence aerospace versus other industrial technology based companies. He would probably have a preference for United Technologies, primarily because the defence world is really a tough one to figure out. The risk of either winning or losing a program is quite high, which is going to put a damper on any kind of multiple expansion on defence companies.

The aerospace stocks in the US have just been amazing. No surprise as they are basically government organizations. It looks like the F 35 is actually going to fly. His model price is $167.17, a -12%. On any sort of correction you can get on these companies he would put it on his list to Buy.

Focus on themes, rather than stocks, for RRSP US exposure. Take a look at defense or US financials.

They have stopped cutting defense spending in the US. 3% dividend and 15-16 times earnings. They solved lots of the problems with the F-35. Thinks they will increase their dividend and buy back shares. Doesn’t expect a lot of top line growth.

The US defence industry, for many years leading up to the last 12-15 months, was a very desolate and terrible place to be. First of all because of US government cutbacks. With the beginning of ISIS and the new conflicts starting globally in the last 6 months, the need for defence has really ticked up. This company has a couple of special product lines in fighter jets, which are sort of world standard, so they have a guaranteed growth profile. However, generally speaking defence stocks are not expensive and are either at or below the S&P 500 multiple. This company has some very unique R&D projects going. He likes this at this time.

His premise is that sectors go into and go out of favour over periods of time as things shift. We have just gone through a 10-12 year period where defence spending has been curtailed. When that takes place, at some point they spend too little and you start to see politics go the other way. This company has the F 35 fighter jet. It’s early days in that program and is probably a 20 year project selling them globally. There is good visibility once they start building an order book. This company has been successful through the downturn and have grown their dividend 19% a year, over the last 5 years. That is likely to accelerate. Expect to see defence spending pick up over the next 18 months. Yield of 3.18%.

Big defence company with the US government as their customer. Trading at a pretty high multiple. Has a very nice yield of close to 3.5%. A mature industry that generates a lot of cash flow. Have adopted a policy of double-digit dividend growth, so in this low interest rate environment, there have probably been a lot of income seeking investors going into the name. If you own, she would take some money off the table.

Because of defense business trending down, she would avoid it. It is okay for a dividend and they generate a lot of cash flow. There will always be bad people out in the world.

(Market Call Minute.) There will definitely be a slow down in defence spending in the US, there is no question. But there will probably be a pickup in defence spending in emerging markets so it is a mixed bag.