Ahead Of The Curve: What Defense Stocks Are Saying
11-Feb-03 00:53 ET
[BRIEFING.COM - Robert V. Green] It appears that we are about to go to war. In virtually every media, this message is being drilled into us. So how come defense stocks aren't going up?
Defense Stocks - Not Climbing
Conventional wisdom is that defense stocks benefit from a war.
After all, wars consume weapons, ammunition, supplies, vehicles - munitions of all kinds. The suppliers of those munitions generally see their business improve. Sounds cold-hearted, but its true.
Historical Perspective - The Market in Desert Storm
This chart summarizes the overall market in Desert Storm, eleven years ago.
The "situation" began on August 2, when Iraq invaded Kuwait. This occurred just one week after US Ambassador April Glaspie told Sadaam Hussein that the existing Iraqi-Kuwait dispute was a matter for the two countries to resolve and not a US concern. (Big mistake).
Stocks immediately declined on the fear and uncertainty of war. However, over the next five months, the US and the UN made preparations for war. Stocks actually rose about 10% (the S&P500 rose from 300 to 330) in the period preceding the actual start of war, as the chart shows.
Then when war actually began, stocks rose sharply, reaching almost 380, (a 25% rise in just six months).
Defense Stocks in Desert Storm
The defense stocks during that time period did even better than the overall market.
The following highlights some of the performance of a few of the larger defense stocks during this period. (There are only about 40 of size in the entire sector.)
Company Stock Description Return - Pre-War Return Post-War
Lockheed Martin LMT High tech weapons systems 19.2 % 53.5 %
Raytheon RTN Scud missiles 16.8 41.2
Northrup Grumman NOC Radar, surveillance systems, aircraft 22.0 102.7
Alliant Techsystems Inc. ATK Ammunition, rocket fuel, munitions 12.8 62.3
DRS Technologies DRS Thermal imaging, ruggedized computers, tank control systems 61.7 146.9
Kaman KAMNA Helicopters 16.3 36.3
United Industrial Corp UIC Survelliance planes, F-16 control systems -1.6 28.3
Allied Defense Group ADG Ammunition, grenades, mortars, security and survelliance systems 275.0 663.0
S&P 500 SPX Market Index -11.3 % 5.5 %
The "Pre-War Period" above is the period from August 1, the day before Iraqi invasion to January 12, the day Congress voted to authorize the use of troops in Desert Storm. The "Post-War Period" performance measurement is from August 1 to March 30, approximately four weeks after Iraq surrendered.
It seems pretty clear that war was good for the defense stocks.
Defense Stocks Today
The defense sector is not behaving the way it did prior to the Desert Storm event. The overall sector has had terrible returns over the past year, and have roughly paralleled the general market for the past quarter. The overall performance for the past six months is much worse than the market.
33 largest Defense Stocks 4 week return 13 week return 26 week return 52 week return
Average Return -9.8 % -6.2 % -20.4 % -11.0 %
Market Cap Weighted Average Return -11.2 -9.9 -23.8 -19.7
S&P 500 -10.6 % -7.3 % -8.7 % -24.3 %
On January 30, 2002, George Bush named Iraq part of an "Axis of Evil" in his State of the Union address, just four months after the Attack on America. The returns above are based on stock prices as of February 7, 2003, so the 52 weeks are based on prices just one week after that speech.
Here are the same statistics for the stocks listed above for the Desert Storm example.
Company Stock 4 week return 13 week return 26 week return 52 week return
Lockheed Martin LMT -12.1 % -11.2 % -23.6 % -7.9 %
Raytheon RTN -6.0 0.1 -15.1 -22.3
Northrup Grumman NOC -7.2 -6.9 -21.3 -16.1
Alliant Techsystems Inc. ATK -18.7 -20.1 -25.8 -14.3
DRS Technologies DRS -16.5 -31.4 -34.9 -34.8
Kaman KAMNA -16.6 -15.9 -26.3 -31.1
United Industrial Corp UIC -5.5 -29.7 -31.5 -24.6
Allied Defense Group ADG -15.5 % 6.9 % -33.8% -6.6 %
There is not a winner in the bunch.
Wall Street is not betting on defense stocks to benefit from war with Iraq.
Conclusions
What conclusions can you draw from this?
The failure of defense stocks to rise going into conflict of Iraq could mean that the market believes any of the following:
There will not be a war.
Any conflict will be so brief as to have no lasting impact on the business results of the defense stocks.
War makes any stock, including defense stocks, a risky investment, because war will mean permanent disruption of our economic life, due to increased terrorism and disruption.
The traditional "defense stock" concept is obsolete.
The "war is so bad it makes even defense stocks unholdable" concept just doesn't seem valid to us. There is always someone, even in wartime, willing to make an investment in a business that will prosper.
The last concept, "defense stocks are wrong," is one worth pondering. The list of stocks in the defense sector may be the wrong stocks to be looking at, for today's war. If the war lasts only 24 hours, how much new revenue does it really create for these companies?
Flir Systems, (FLIR) might be a good example of this last point. Flir is primarily a security company. They make cameras and alarm systems. Fear of increased terrorist activity prompting sales of securities systems is probably the premise behind FLIR's 14% rise over the past six months.
However, the most reasonable explanation seems to be that the market has decided there will not be a war of a magnitude great enough to cause revenues at defense stocks to climb.
Conclusion
Movement in the overall market is generally attributed to uncertainty towards war. Events moving us closer to war are thought to drive stocks down. Events moving us away from war drive stocks up.
Movement in the defense stocks, however, appears to be telling us that the market thinks war is not coming at all.
That particular thought is probably comforting to everyone except shareholders of defense stocks.
Comments may be emailed to the author, Robert V. Green, at rvgreen@briefing.com |
