Dash to cash
U.S. investors are dashing to cash whilst stock markets are temporarily a mess. Bank of America Merrill Lynch’s weekly fund manager survey showed 4.8% of the record equity outflow last week went into cash and cash-like securities, the most amongst assets BofA monitors. That followed a 4.4% rise in allocations to ‘cash’ in January. That says investors want to keep their powder dry. It also says investors realise tax cuts are expected to require more debt issuance, whilst rising wages and unstinting economic growth will keep the monetary tightening path steep. All that will keep Treasurys out of favour.
Stop gap defence
Under such circumstances, we expect short-term defensive equity allocations to come into view and the ‘value’ side of the market to attract most interest. Our quick and dirty quantitative price analysis screened the S&P 500 Value Index. We sought stocks with enhanced momentum—those with a 21-day moving average that had recently crossed over a longer-term moving average. We also filtered for equities with outstanding volume but whose prices remained relatively static.
Unsurprisingly, narrowing our horizon presented only a handful of candidates. The theme was defensive in more ways than one. Aerospace & defence giants like Boeing and Lockheed Martin are in the spotlight right now as North Korea increases missile tests and defence budgets rise in the States, the Middle East and Asia. Lockheed is the timeliest pick in the sector, according to our screen.
The $95bn group has been making the headlines this week at the Singapore Air Show. Investors are hopeful that Lockheed’s deal pipeline is cranking up after a $524m missile contract was announced on Thursday, and a top executive said an order for one hundred F-16s could be inked “soon”. Singapore was also “seriously evaluating” a purchase of F-35s, the exec said. Last month, the Pentagon awarded the group a $150m contract for a laser weapon system, noting the deal could eventually grow to $942m. Lockheed's quarterly revenues, announced last month, rose 11.8%, beating forecasts. It also issued higher profit guidance than expected. On the negative side, the group's stock has been most sensitive of late to the impact of its Black Hawk helicopter programme--its single most profitable business--drawing to a close. Lockheed expects Black Hawk revenues to be gradually replaced by a new CH-53K helicopter programme for the U.S. Marines. The stock rose almost 40% over a year before the market correction, during which it shed 10%. The group will pay an interim dollar dividend on 28th February.