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Syria Strike Could Trigger Wider Conflict: 4 Defense Picks

Zacks

On Friday night, President Trump revealed that he had authorized U.S. armed forces to conduct precision military strikes on Syria. The attacks, conducted in unison with France and Britain, was a reprisal for the chemical attack ordered by the Assad regime on the rebel-held town of Duma on Apr 7. On Apr 14, Trump declared that the strikes were a success, tweeting “Mission Accomplished.”

Meanwhile, Russia expressed anger over the U.S.-led missile strike on Syria. And on Sunday, the U.S. Ambassador to the United Nations said the United States is likely to impose new sanctions against Russia because it continues to back President Assad’s regime. With recent missile strikes likely to snowball into an extended conflict, it makes sense to stock up on defense stocks.

“Mission Accomplished,” Says Trump

Trump’s order for a missile strike on Syria was a marked departure from his initial stance on the issue. As late as last week, Trump had said that he was in favor of U.S. forces withdrawing from Syria. But the situation changed drastically after Apr 7 with the President tweeting that missile strikes were likely forthcoming.


On Apr 14, Trump said the missile strikes were “perfectly executed” and had accomplished their objective. Defense Secretary James Mattis also characterized the strikes as a “one time shot.” But Trump also said the United States was “prepared to sustain this response until the Syrian regime stops its use of prohibited chemical agents."

Russia Warns of “Consequences”, U.S. Sanctions Likely

Russia has expressed its displeasure over the U.S. led joint strike with its ambassador to the United States Anatoly Antonov saying that his country’s “worst apprehensions have come true. Antonov’s statement, released on Twitter also warned that unspecified “consequences” were likely to follow.

Comments from U.S Ambassador to the United Nations Nikki Haley on Sunday raised chances of an escalation even further. Speaking on CBS’s “Face the Nation,” Haley said U.S. Treasury Secretary Steven Mnuchin would announce fresh sanctions against Russia on Monday. These sanctions would be targeted at “companies that were dealing with equipment related to Assad and chemical weapons use.”

Defense Stocks Benefit From Middle-East Conflict

Together, the United States, Russia and France launched 105 missiles on targets in Syria. Of these, 19 were JASSMs manufactured by Lockheed Martin Corporation LMT and 66 were Tomahawk cruise missiles made by Raytheon Company RTN. On Wednesday, shares of both these companies gained almost 1% after Trump said Russia should “get ready” for a missile attack on Syria.

Meanwhile, historical data shows that U.S. defense stocks tend to outperform the broader market when the United States engages in a military offensive in the Middle-East. CNBC Analysis using Kensho shows that the S&P 500 aerospace sub-industry gained 1.5% a month after such an offensive. Over the same period, the Dow and the S&P 500 gained less than 1%. On Apr 11, the iShares U.S. Aerospace & Defense ETF (ITA) gained 0.5% even as the S&P 500 lost 0.3%.

Our Choices

Though the Pentagon believes that the current offensive has been concluded, signs are rife that it may have only served to escalate tensions. Russia has issued strong protests against the assault and with the United States preparing to issue fresh economic sanctions, the conflict in Syria is far from over.

Also, historical data shows that U.S. defense stocks gain after a military offensive in the Middle East. Adding select defense stocks to your portfolios looks like a smart option at this point. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks based on a good Zacks Rank and a VGM Score of B.

Huntington Ingalls Industries, Inc. HII designs, builds and maintains nuclear-powered ships such as aircraft carriers and submarines, and non-nuclear ships, such as surface combatants, expeditionary warfare/amphibious assault and coastal defense surface ships for the U.S. Navy and Coast Guard.

Huntington Ingalls has expected earnings growth of 43.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 21.9% over the last 60 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Raytheon is one of the largest aerospace and defense companies in the United States with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems, and technical services.

Raytheon has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 27.2%. The Zacks Consensus Estimate for the current year has improved by 0.3% over the last 30 days.

The Boeing Company BA is one of the largest defense contractors in the United States. The company’s customers include domestic and foreign airlines, the U.S. Department of Defense, the Department of Homeland Security and the National Aeronautics and Space Administration (NASA).

Boeing has a Zacks Rank #2. The company has expected earnings growth of 16.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days.

Northrop Grumman Corporation NOC supplies a broad array of products and services to the U.S. Department of Defense, including electronic systems, information technology, aircraft, space technology and systems integration services.

Northrop Grumman has a Zacks Rank #2. The company’s expected earnings growth for the current year is 17.1%. The Zacks Consensus Estimate for the current year has improved by 0.3% over the last 30 days.

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