Investors Can Go Long on This Defense Name As Adversarial Threats Grow

Ahead of outgoing U.S. President Biden's national address, the North American Aerospace Defense Command (NORAD) detected, tracked and ultimately deployed American and Canadian fighter jets to intercept two Russian Tu-95 and two Chinese H-6 aircraft that appeared to be working together off the coast of Alaska. 

The aircraft were operating in the Alaska Air Defense Identification Zone (ADIZ) but did not violate sovereign U.S. or Canadian airspace. While these are strategic bombers, they do not have the size nor do they have the long-range capabilities of a U.S. Air Force modernized B-52.

It is not really all that unusual for Russian or Chinese military aircraft to be seen in the ADIZ, but this is the first time that Russian and Chinese military aircraft have been seen working together in the area. The bombers were not escorted by fighter aircraft, which would have taken the potential threat to another level. The point is that demand for U.S. military hardware and for that hardware to remain top notch in quality is going to have to be a priority going forward, as it has been looking back.

We have a fiscal imbalance and federal debt-load in this country that will force debt service to carve out a larger and larger slice of the federal budget, at the expense of discretionary and possibly even some non-discretionary items. Our adversaries know there will be a temptation to cut defense. We have a lame duck president at the current time. Our adversaries as well as our allies know this. That president is no longer close to the top of his game. Our adversaries know this as well. This is one reason they are testing our response times at potential points of conflict.

Just last week, we learned that Iran had put bounties on the heads of former president and current nominee Donald Trump as well as former Secretary of State Mike Pompeo, for fear that their return to power in the U.S. would be less favorable than the alternative. Without getting political, this is about defense, but the Biden administration has been soft on Iran as the former president's administration most certainly was not. What does this mean?

Inelastic Demand for Defense?

Taiwan would need to be defended if something awful happened in Asia, as would Japan and South Korea. Israel's war in Gaza is hopefully slowing to a crawl, but NATO's aid to Ukraine in response to Russia's invasion of that country shows no signs of abating. Do we even bring up our own southern border? Active-duty federal troops are prohibited from being deployed domestically. That leaves an undermanned border patrol and the state National Guards on their own. That border cannot remain as open as it has been for three plus years, even if the left retains power.

You May Have Noticed....

That Lockheed Martin LMT reported earlier this week. Readers know this has been my top defense stock for a long time, and it has often loved me back. This is one of those times, as the stock has kept my portfolios afloat.

I am also long Northrop Grumman NOC and General Dynamic GD. NOC reported this morning, had a nice quarter and is up almost 5% today. GD did not have as nice of a quarter and is now consolidating after what was a long rally. 

Another defense name reported this morning. An old friend that I had discarded and then missed out on a very nice rally. I am speaking RTX Corp RTX, or what we used to call Raytheon Technologies. Raytheon, or RTX, is well known as the purveyor of Tomahawk, Patriot and Stinger missiles and associated equipment/launchers. The list goes on. I could probably name 40 weapons systems or radars and electronics that you never heard of, but that RTX either manufactures or contributes to.

RTX Corporation

On Thursday morning, RTX posted a Q2 adjusted EPS of $1.41 on revenue of $19.8 billion. Both numbers were good for solid beats, as the top-line print reflected year-over-year growth of 7.5%. Full year guidance was provided that took adjusted sales up to $78.75 billion to $479.5 billion from $78 billion to $79 billion and adjusted EPS from $5.25 to $5.40 up to $5.35 to $5.45. Free cash flow is expected to land at $4.7 billion. That would be down from the previously seen $5.7 billion. For the quarter reported, RTX generated free cash flow of $2.196 billion, up from $193 million for the year-ago comparison.

The stock trades at 19 times forward-looking earnings, which is in line with LMT and GD. NOC trades at 17 times forward earnings. RTX also pays shareholders $2.52 in cash per share per year to stick around. That's a yield of 2.4%, in line with LMT and better than NOC or GD. Let's take a look:

Look at that rally. I didn't miss all of it. Nor did I catch most of it. What's that? In the upper right-hand corner?

We have a cup pattern with a $109 pivot. The stock gapped to the upside this morning. and now sports a technically overbought reading for relative strength and a suddenly robust looking daily MACD. When the 21-day EMA crosses above the 50-day SMA that will create what is known as a mini- or swing-traders golden cross and could provoke a positive algorithmic reaction.

While I don't relish purchasing shares of a stock that is now up more than 8% for the day, I don't see our adversaries playing nice any time soon. I want to be long this stock, but I don't want to chase it. If only there were a way... 

Keep in mind that if the cup adds a handle the pivot shifts from the left side of the cup to the rights side.

Ideas

• Wait a day or three, or see if there is an opportunity to purchase equity below the current price
• Start nibbling close to pivot
• Sell (write) August 16, 2024 $109 puts for about $0.60, in case pivot is tested from above
• Sell (write) September 20, 2024 $105 puts for about $0.70 in case the gap fills

RTX

• Target price: $130
• Pivot: $109
• Add: Down to the 50-day SMA
• Panic: On new post June/July low or 8% loss

At the time of publication, Guilfoyle was long LMT, NOC and GD equity.