Defense Stocks Stand Down: Why NOC, LMT, RTX & Others Lag Amid U.S.-Iran War

a mixed but contained story. It's time to go inside out though on the defense sector. And joining us now is Brandon Clark, the director of financial planning at the Clark Group Asset Management. And looking over your notes here Brandon good morning to you. Happy Friday. This seems this broader defense sector seems to be an area that you and your team like at the moment you want to walk us through sort of how you're assessing the landscape of defense at the moment. Yeah, absolutely. Good morning Alex. Great to be back on the show. So we view defense as much more than just a short term trade on what's going on with the war. It's definitely a strategic part of our portfolio. If you look at what's happened with Ukraine and Russia invading Ukraine in 2022, and you look at what's happening with the Iran war, it's pretty much depleted Western defense inventories at a time when the U.S. really needs it the most. You've got longer term threats from countries like China. You've got the wild card country of North Korea that's always looming, and you want to make sure that you have the right type of defense in place in the event something materializes from those countries. So let's just say that the conflict in Iran ended tomorrow. Let's say it ended on a Saturday of Labor Day weekend. Everyone's pretty happy. That doesn't mean that defense spending just starts to simmer down. The weapons and the missiles that have already been used still need to be replaced. And then increasingly, the the goal isn't just to restore those inventories, but also to build much deeper stockpiles and just overall greater production capacity. So if you now look at the spending that the U.S. is doing, the war itself has cost the government about $40 billion. And the annual budget for 2026 is about $1 trillion. If we look at 2027 that budget estimate is about $1.5 trillion. So even outside of the U.S. though, if you look at other NATO members, they've committed towards about 5% of GDP annually just on defense by 2035. So clearly not just the U.S. the whole globe is really putting a lot of money towards defense spending. And it kind of looks like a a pretty straightforward multiyear cycle. You've got depleted inventories that lead to more government orders that lead to much larger backlogs for defense contractors like Raytheon, Boeing Lockheed Northrop which leads to overall greater production and then inherently more revenue and free cash flow for these for these companies. So all in all, I think it's an area that you want to have exposure to in the long term. Brandon. So say someone's listening along, I'm listening along. You lay out a case that seems pretty compelling, which is one that has sort of a long run, durable cycle, you know, sort of geopolitical trends that are becoming a little bit more globalized, maybe more protectionist. That's also a potential boost to the demand and depleted stockpiles as well, which is sort of the, the need for the for the supply, you know, so then the natural question is, and you mentioned some of the names. So sort of a compound part of this, maybe you can talk a little bit more about some of the names that you like, but why the kind of discrepancy from what seems like a pretty bullish thesis and maybe not so bullish a price action recently? Yeah, it's a great question. So I think there's two parts to that question. And there's a reason why we've seen really throughout this year a lot of volatility in aerospace and defense. If you look specifically at the ticker PPA out of Invesco, there's another good option out there out of iShares ITA. There's really two drivers to what's been happening over this year and really kind of the underperformance relative to the market. The first reason is wars typically have just a short term impact to the market. Broadly speaking, if you look out about a year after a war takes place, going all the way back to Pearl Harbor, 70% of the time, the market's been higher a year out. If you go out three years after a war has taken place, the market's never been lower. So I think the market is realizing, well, wars are really short term impacts on the market. There's no fundamental impact to the economy long term. Unless you experience a world war, which doesn't really happen very often. And In turn, I think the market is realizing, look, we want to money is starting to flow into other areas of the market, like tech. And at this point, that is putting some pressure, I think, on areas like defense. In addition, if you just look over the past few weeks as what's as to what's happening, bond yields, you look at the 20 and 30 year Treasury yields. Those have started to go up. A lot of that's due to concerns around inflation being a lot stickier than we originally expected heading into this year. And in turn, monetary policy is getting a lot tighter, which means interest rates could go up. And ultimately, that is putting a lot of concern on our budget deficit, on our on our overall debt. And so going back to what I said a few minutes ago about how much money our country is spending on defense, 1.5 trillion is expected next year. Where could we start cutting to, in turn, help with our budget deficit? Well, it could potentially be defense funding. I don't think that will happen, but I do think the market is reflecting that with over the past few weeks defense selling off a bit. Yeah, it's always important to to say, hey, maybe I don't think I'm wrong, but where can I be? And it's a, it's always a good exercise to look at where things can go wrong with an investment thesis. Really appreciate you taking the time. Have a wonderful holiday weekend and we'll catch up soon. Brandon Clark from the Clark Group Asset Management. Tom White is here, host of Fast Market. We went from Kevin to Tom white. And Tom, you're looking at one of the names in this space. You're going to look at an example trade. I'm sure you heard you know Brandon's thesis. I think it makes a lot of sense. But for those who look at the price performance, they can say, hey, there's clearly some sort of divide here. Yeah. Especially when you see, you know, names in the defense, you know, area environment actually pulling back in correction territory, a couple of them in bear market territory down 1,020% from their recent all time highs. So that provides some opportunities. So I looked at RTX which still having a good year up about 10%. But we've seen that pullback about 5% this week, 10% overall from recent all time highs. So I looked at something bullish implied volatility levels low RSI on a technical basis getting in the low 30s maybe oversold at this point. So if you think the stock's going to rebound ahead of earnings on the 20th of October. This strategy takes advantage of that. This is out in the October 16th monthly option. So 42 days to expiration. It expires right before earnings. So you get rid of that event risk right. But maybe take advantage of a move higher into the report with the stock trading about 200 bucks a share here. I looked at buying the October 2nd hundred call and then selling the 220 strike call against it. So a bullish $20 wide call vertical. You're paying roughly about a $6 debit. There's your risk 600 bucks with about the potential to make about 1400 if it goes back above 220 over the next month and a half. Now it takes your break even up to 206. Well, how far above that above the current share price is, and it's only about 2.5% higher than the current share price. So you don't need an outsized move on a percentage basis. Implied volatility levels have come in a little bit, so that allows you to buy this vertical bullish vertical cheaper than you normally would. If maybe if volatility was higher and gives you some flexibility. As far as trade management, I don't have to wait 42 days for this to pay off. If I start getting that move back up above 206 to maybe 210, 215, this thing starts to expand in price, gives you that flexibility to maybe close it ahead of time. Alex. Appreciate it. Tom White make sure you check out Tom and