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I've been getting a lot of calls from reporters who ask how investors should position their portfolios in response to the likely armed conflict with Iraq. "Should investors buy defense stocks?" they invariably ask.
My response: Not necessarily. I tell them that it seems to me that while some small one-product defense companies may do well because of their particular niche, most of the large contractors in the S&P Aerospace/Defense index aren't sure bets. Just take a look at their shares, which haven't done very well in the past year. That reflects Wall Street's expectation that, just as in the last war with Iraq, the battle will be largely fought out of existing weapons inventory -- which means a huge arms buildup isn't likely.
What's more, most of the money Uncle Sam spends on the war effort will likely be directed toward maintaining personnel in the region in the months after the actual fighting has taken place.
GET DEFENSIVE. The other reason aerospace and defense stocks aren't expected to be long-term outperformers is that most offset their military operations with commercial units. So while demand for defense items may rise before and during a war, the demand for commercial items, such as airplanes or jet engines, usually declines. (Just ask Boeing (BA
) about the pace of aircraft orders in the wake of the September 11 terrorist attacks.)
My position has been that investors are better off buying "defensive" issues, rather than "defense" stocks. By defensive, I mean those sectors and industries that offer products and services with fairly static demand, whether economic times are good or bad. One sector that's frequently described as a haven for investors is Consumer Staples, which comprises food, beverage, tobacco, and household-products industries.
And indeed, I have been telling journalists that investors would have been better off buying beer than bullets in 2002, since the S&P Aerospace/Defense Index fell over 7%, while the S&P Brewers index rose by more than 7%. (The beermakers have frequently been on the list of industries with top Standard & Poor's Relative Strength rankings over that time.)
RECORD SHIPMENTS. Would that still be a good strategy for 2003? The answer is yes. S&P analyst Howard Choe recently upgraded his ranking on industry leader Anheuser-Busch (BUD
) to 5 STARS (buy). On Jan. 9, Anheuser reaffirmed its fourth-quarter and 2003 earnings-per-share growth estimates as solid beer consumption and successful new-product introductions have helped Anheuser achieve record shipment volumes (also see BW Online, 1/15/03, "Big Changes Are Brewing at Miller").
Choe is encouraged by indications that it has been able to make recent price increases stick. With Anheuser consistently delivering EPS growth in the low- to mid-teen percentage range -- while boosting its cash dividends -- Choe says the shares appear very attractive based on his 2003 EPS estimate of $2.47.
S&P Relative Strength Rankings
The following are the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 116 industries in the S&P 1500) as of January 10, 2003.
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief investment strategist for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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