Play Defense with Northrop Grumman

11/11/2019 5:00 am EST

Focus: INDUSTRIALS

Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

Defense stocks offer both downside protection and potential upside. In today’s environment, that should make them core holdings for all investors, explains Scott Chan, contributing editor to The Complete Investor.

Historically U.S. defense spending is recession-proof. Recent concern about an economic slowdown is one good reason to own defense stocks. An even more compelling reason is escalating global tensions, starting with our increasingly erratic and contentious relationship with China.

Defense stocks offer both downside protection and potential upside. In today’s environment, that should make them core holdings for all investors.

Our top defense pick is Northrop Grumman (NOC), which is best known for its aerospace and mission control capabilities, encompassing manned and unmanned aircraft and high-tech electronic surveillance and targeting systems. Its engineering expertise makes it costly for customers to switch to rivals and keeps Northrop one of the Pentagon’s go-to contractors.

The company’s June 2018 acquisition of Orbital ATK, which added high-end products for the U.S. military and NASA space systems, already is paying off. Renamed Grumman Innovation Systems, the division recently won a $1.1 billion contract to test the U.S. ballistic missile defense system.

Northrop also is the sole bidder for the first phase of a planned new intercontinental ballistic missile system potentially worth $60 billion. Boeing dropped out, claiming the Orbital purchase had given Northrop an unfair cost advantage.

Northrop also has a contract with the Pentagon for the future sale of 100 next-generation long-range bombers (the B-21) over the next 15 years or so, a deal that could cumulatively bring in about $80 billion. For a well-positioned defense company with growing revenue, strong cash flow, and a large safety net, look no further than Northrop.

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