What are we looking for?
U.S. listed aerospace and defence stocks that offering good growth prospects and reasonable valuations.
In the past 10 years, the U.S. aerospace and defence sector has performed extremely well. Over this period, the S&P aerospace and defence index delivered a 167-per-cent return, compared with just 71 per cent for the S&P 500. Furthermore, these industries tend to operate with very long planning horizons and tend to fare better in market declines than do many other sectors. This is an interesting consideration in light of U.S. markets hovering at or near record highs.
The screen
We will be using Recognia Strategy Builder to focus on the larger and more stable companies in this sector. We will begin by setting a market cap threshold of $4-billion (U.S.). Next, to zero in on companies poised to grow in the coming year, we will use the projected earnings per share growth rate (this year versus last year). This growth rate is based on analyst estimates for EPS growth in the coming year.
In order to ensure we don't overpay for our investments, we will filter based on the forward P/E ratio of the companies. We wish to select stocks with a forward P/E ratio of 25.0 or less. Finally, we will also impose a limit on company debt levels using a debt to equity threshold of 1.25 or less. With the prospect of increasing interest rates on the horizon, companies with significant debt will face earnings headwinds as their debt service costs increase.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Portland, Ore.-based Precision Castparts Corp. lands at No. 1 on our list. The company is a supplier of complex metal components used in the defence and aerospace industries. On Jan. 22, the company announced fourth-quarter results that missed expectations for both revenue and earnings. The stock dipped on the news, but has since rallied. The company's forward P/E ratio is now among the lowest of its peers at just 15.3.
Orbital ATK was formed in 2015 as the merger of Orbital Science Corp. and Aliant Techsystems. The company is best known for providing commercial satellites as well as launch systems, including the Cygnus cargo carrier, which supplies the International Space Station. The company has one of the highest forecast EPS growth rates on our list at 31.8 per cent and has a reasonable valuation compared with its peers with a forward P/E ratio of 14.4.
Boeing Co. is the largest company on our list with a market cap of $105-billion. Boeing is a leading supplier of commercial jets, defence and space systems. On Jan. 28, the company announced fourth-quarter results that beat expectations handily on both revenue and earnings. The stock rallied strongly on this news and is now up approximately 14 per cent, year to date.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.