Class Exercise Defense Stocks. Bruce D. Crawford Advanced Investment Seminar March 21, 2018

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1 Class Exercise Defense Stocks Bruce D. Crawford Advanced Investment Seminar March 21, 2018

2 Disclaimer I am not licensed or qualified to provide investment advice. Consider your own situation carefully and consult with a properly licensed and accredited professional before making or disposing of any investments involving real money.

3 Contents Introduction and background Finding candidate stocks Aerospace and Defense exchange traded funds The Modern Warfare Motif Value Line Narrowing down the choices: StockCharts.com Conclusion

4 Introduction and background The task at hand is to focus on the top five holdings in the ishares U.S. Aerospace and Defense exchange traded fund (ETF) with the goal of identifying a single best investment in the set. In addition, participants are free to choose one additional stock with business operations in the defense area. I have chosen Viasat, Inc. (VSAT), and have included it in my analysis.

5 Introduction and background (cont d) Although the defense industry covers a lot of ground, my analysis will focus on the Arctic region. Investments are forward-looking and I expect that the global warming phenomena will permit the opening of previously-frozen shipping channels which will have some impact on the rerouting of global trade routes. This will result in decreased transit times. The global warming phenomena may also result in a need for the defense of these shipping lanes.

6 The Northern Sea Route may be a strategic alternative to the Suez Route in some instances. Image source: amazon.com

7 Russia has begun militarizing the region along the Northern Sea Route. Image source: Business Insider.

8 At the same time, technology is changing to permit public observation of many of these activities. Unfortunately, many of the current satellites do not provide coverage of the arctic regions either for surveillance or for broadband communications. A race is on to provide coverage of these additional areas. (Image source: Apple App Store).

9 Introduction and background (cont d) When choosing an investment, I am thinking about finding a firm that can provide support to warfighters in the arctic region. That is the lens that I will look though at the last stage of evaluating any particular investment. This is just one approach there are many others.

10 Finding candidate stocks I am using three approaches to finding candidate stocks: Examining Aerospace and Defense ETF holdings, Examining holdings of Defense Motifs, and reviewing Value Line Defense industry group holdings. This provides me with a starting list of stock symbols. Then I will use StockCharts.com analytics to narrow down my choices.

11 Aerospace and Defense exchange traded funds (ETFs) A list of U.S. aerospace and defense ETFs can be found on etfdb.com. These include: ITA, XAR, PPA, and DFEN. The largest is the ishares U.S. Aerospace and Defense ETF (ITA). The top 5 holdings as of 2/15/18 are: BA, UTX, LMT, GD, RTN.

12 U.S. Defense ETFs include: ITA, XAR, PPA, DFEN Source: etfdb.com

13 Aerospace and Defense ETFs (cont d) We can look at the monthly charts on StockCharts.com to see whether these stocks are attractive or not. StockCharts.com also has a new feature where we can examine the seasonality characteristics of these stocks. (Monthly charts from the Members area are used by permission from StockCharts.com). Let s look at these five stocks one at a time.

14 Boeing (BA) is overpriced and is way above the top of its upper channel ($ > $219.11). Image source: StockCharts.com

15 In addition, stock prices are not likely to increase in March. Image source: StockCharts.com

16 United Technologies is overpriced by 10.3% but otherwise looks fine ($ > $117.24). Image source: StockCharts.com.

17 If prices on UTX fall in March, it may come into an acceptable buy range. Image source: StockCharts.com Disclosure: I hold a long position in UTX.

LMT is overpriced and is above the top of its upper channel ($360.53 > $309.24).

18 LMT is overpriced and is above the top of its upper channel ($ > $309.24). The Point and Figure chart of LMT (not shown) also indicates a Bullish Triangle Breakout on 2/14/18, so further bubbling up could occur. Image source: StockCharts.com

19 LMT has a strong seasonality component in March, so is likely to continue to rise in the short term. Image source: StockCharts.com

20 GD is overpriced and is above the top of its upper channel ($ > $209.51). Image source: StockCharts.com

21 March has generally been a bad month for GD. April and May, however, have generally been strong. Image source: StockCharts.com

22 RTN is overpriced and is above the top of its upper channel ($ > $177.30). Image source: StockCharts.com

23 RTN does not have a meaningful seasonality component in March so the price could rise or fall. Image source: StockCharts.com

24 The Modern Warfare Motif Motif Investing (motifinvesting.com) is another source for stock symbols that fall into the Defense category. Motif currently masks the individual holdings of its many Motifs, but there is an easy workaround. One can search the Motif website to obtain the broad list of defense-related holdings.

25 Motif Investing is another source for stock symbols related to Defense industry groups. Image source: motifinvesting.com

26 The Modern Warfare Motif breaks down defense holdings into categories but does not show all holdings. Image source: motifinvesting.com

27 An easy work-around is to simply search the Motif Investing website for defense. The results include several symbols that are classified incorrectly, but the search generally returns a pretty good list. Image source: motifinvesting.com

28 Value Line The Value Line Investment Survey can also be used to find Defense related stock symbols. Just search for the Aerospace/Defense industry group under the Browse Research tab to obtain the list of symbols. Select Value Line products are available to Osher Lifelong Learning Institute at the University of Delaware (OLLI) members through the University of Delaware library database website (library.udel.edu).

29 You can also use Value Line to find stock symbols related to Defense. Image source: Value Line.

30 Narrowing down the choices: StockCharts.com I used the screening engine in the Extra members area of StockCharts.com to review the stock symbols found via the ETFs, via Motif Investing, and via Value Line. I have previously programmed a scan (using monthly charts) to find stocks in their upper channels at attractive prices. Running the scan yielded only one stock: VSAT.

31 This particular screen examined stock symbols included in the ITA, XAR, PPA, and DFEN Defense ETFs. Index numbers for your favorites lists may vary from mine depending upon the specific lists that you have created which are unique to your account. Image source: StockCharts.com

32 VSAT is at an attractive price and is in its upper channel, but it pays no dividend. ($65.59 > $72.10 > $91.83). I generally look for a step function in the stock s dividend stream before purchasing a stock. Some tech high-fliers are exceptions. Image source: StockCharts.com

33 VSAT does not show a seasonality pattern for March. Image source: StockCharts.com.

34 Viasat does have a Government Systems division, but operates in other business segments as well. Source: Yahoo Finance.

35 Viasat s secure mobile broadband satellite service does not appear to cover the arctic regions of interest. Viasat has plans to launch additional satellites, so this situation may change in the future. Image source: viasat.com

36 Conclusion In addition to examining the stock holdings of the ishares U.S. Aerospace and Defense ETF (ITA), I looked at holdings in three other ETFs (XAR, PPA, and DFEN). I also examined Defense stocks included in the Modern Warfare motif and various other motifs related to Defense from the Motif Investing website (motifinvesting.com)

37 Conclusion (cont d) I also looked at Value Line and examined holdings in the Aerospace/Defense industry group. Although the top five holdings in the ishares ETF (ITA) had nice step-function dividend streams, they were all currently overpriced. Boeing (BA) was the most overbought, but United Technologies (UTX) was only about 10.3% above its maximum fair value.

38 Conclusion (cont d) I used StockCharts.com to scan all defense-related stock symbols that I found, but only one stock came up as a possible candidate. Currently this stock is in its upper channel and is at an attractive price. Viasat, Inc. (VSAT) is currently priced at $72.10 (as of 2/16/18). The acceptable price range is between $65.59 and $ The stock, however, does not pay a dividend. This could be a speculative stock, but it appears that its secure broadband products do not cover the arctic regions of interest. I will pass this one over.

39 Conclusion (cont d) If I had to pick one of the top five holdings in the ITA ETF (BA, UTX, LMT, GD, RTN), I would pick United Technologies (UTX). Lockheed Martin (LMT) could also appreciate in price in the near term, but I consider LMT to be more speculative at its current price and would rather pick UTX. The seasonality components of this stock suggest that over the past five years, UTX has generally not closed at a price higher than it opened during the month of March (that happened only 25% of the time). This suggests that the stock price has the potential to drop into an acceptable buy range within the next month or so. (I already own the stock).

40 Conclusion (cont d) It is also important to review the stock s fundamentals. United Technologies does have a government business interest through its Pratt and Whitney segment as well as through its UTC Aerospace Systems segment. I do not know if the company s products and services support warfighters in the Arctic regions, but I assume that it does as the companies products are widely integrated into other defense platforms.

41 UTX profile from Yahoo Finance. Source: finance.yahoo.com

42 UTC Aerospace Systems are a part of the United Technologies defense business segment. Source: utcaerospacesystems.com

43 United Technologies is also poised to grow with the Rockwell Collins addition. Source: Value Line Investment Survey

44 United Technologies is planning to acquire Rockwell Collins, another strong player in the Defense business. Source: rockwellcollins.com

45 Conclusion (cont d) Therefore, United Technologies (UTX) is my choice for the purposes of this exercise.

46 Questions? Thanks! Bruce D. Crawford Osher Lifelong Learning Institute University of Delaware

BA:NYE (The Boeing Company)

BA:NYE (The Boeing Company) Values as of 18th Mar, 2019 Last Close USD 372.28 Change -6.71(-1.77%) 1 Yr Capital Gain 12.65% Earning Growth (5 yr) 199.34% 1 Yr Dividend Return 2.17% Average Target Price 426.47(+14.56% ) 1 Yr Total