Rough trading to start 2014 is demonstrating that the easy
upward slope of last year is likely a thing of the past. Correct
sector selection will likely be needed to power gains this time
around, especially given the recent worries regarding some of the
former market leaders.
Companies in both the technology and biotech segments-which have
been soaring and powering many portfolios for the past few
months-have started to see some weakness in recent trading. While
this could just be a temporary pull-back, it may also represent the
beginning of the high beta name run and that other segments are due
to take over leadership in the market.
New Sector Worth a Closer Look
One segment that investors definitely need to keep a closer eye on
is the aerospace and defense sector. This industry currently has a
Zacks Industry Rank in the top 5%
and it is seeing some strong fundamental factors underpinning its
lofty position too (see
Aerospace and Defense ETF Investing 101
Obviously, one of the prime reasons for the renewed interest in the
space is the rising tensions in Eastern Europe. A more aggressive
Russia could spur Western countries in Europe to finally open up
their pocketbooks and spend on defense to combat this new threat.
Meanwhile, concerns about reduced military spending back in the
U.S. have pretty much been taken in stride by the sector. Most of
the cuts look to hit personnel, saving many of the 'big ticket'
items that several defense contractors see huge revenues from. This
suggests that the budget issues will remain a non-factor for the
space, at least in the near term.
And if that wasn't all, the aerospace side of the equation is also
looking quite promising too. Civilian demand for air travel is
surging across the globe, and this is boosting demand for jets and
related hardware, helping a number of companies in the sector which
have huge operations in this corner of the market (read
3 Top Ranked ETFs that Will Crush the Market in
So overall, the sector is looking quite promising, and especially
so given some of the outsized weakness in many of the high-flying
names in other key sectors. Fortunately there are a few top ranked
picks in this corner of the market, and we have described a few of
our favorites below, any of which could be ready to take-off and
lead the market higher in Q2:
Top Aerospace and Defense ETFs:
SPDR S&P Aerospace & Defense ETF (
This is the cheapest choice in the aerospace and defense ETF
market, charging investors just 35 basis points a year in fees for
its exposure. The fund takes an equal weight approach, tracking the
S&P Aerospace and Defense Select Industry Index, holding about
three dozen stocks in its basket (see
all the Industrial ETFs here
Due to its equal weight approach, no single stock comprises more
than 3.7% of assets, leading to a very spread out profile. This
also ensures that mid caps dominate the portfolio, as large cap
stocks only account for one-third of the total assets in XAR.
The fund currently receives a top Zacks ETF Rank #1 (Strong Buy),
and it could be an interesting choice for investors looking for a
cheap, spread out play on this in-focus sector.
iShares US Aerospace and Defense ETF (
For investors seeking the most popular choice in the aerospace and
defense ETF world, this iShares fund is definitely it. This
cap-weighted fund tracks the Dow Jones US Select Aerospace and
Defense Index, holding just under 40 stocks in its basket.
Unlike XAR, this product has a large cap focus, as big cap stocks
make up more than 50% of the portfolio compared to roughly a
quarter for mid caps. Familiar names like United Technologies
(UTX), Boeing (BA), and Lockheed Martin (LMT) take the top three
spots, and together these three account for more than 23% of the
This fund also receives a Zacks ETF Rank #1 (Strong Buy), and it
may be a top pick for investors seeking a global low risk play on
this industry (see
the Top Ranked ETFs here
Top Aerospace and Defense Stocks:
Huntington Ingalls Industries (
If you are looking for more of a nautical play on the defense
industry, consider HII. This company primarily builds, designs, and
repairs ships for the U.S. Navy and the Coast Guard, ranging from
nuclear-powered ships like aircraft carriers and subs, to
amphibious assault vehicles and coastal defense ships.
HII has seen very strong positive earnings estimate revisions as of
late, including universal agreement for both the current quarter
and the current year. in fact, the current year consensus has
soared from $6.22/share 30 days ago, to its level today at
$7.04/share, suggesting that analysts believe a bright future is
ahead for HII.
Thanks to these factors, HII currently has a Zacks Rank #1 (Strong
Buy), meaning it could be primed for more growth in the months
Wesco Aircraft Holdings (
For a slightly different play on the aerospace segment, consider
WAIR. This company specializes in supply chain management for a
variety of aviation programs both in the military and civilian
spheres. This niche could be a great one to be in as higher demand
for a variety of planes and jets forces companies to become even
more efficient in order to meet demanding customer needs.
WAIR has also seen rising earnings estimates as of late, and the
company is looking for double digit earnings growth for both this
year and next. Growth is actually expected to improve in the next
year time frame compared to this year, meaning that WAIR may still
have incredible potential.
Due to this, it shouldn't be too surprising to note that WAIR has
moved from a Zacks Rank #3 (Hold) up to a Zacks Rank #1 (Strong
Buy) just this month, so it may be primed to see strong gains in
the months ahead too (also read
Best ETF Strategies for 2014
Markets have been choppy as of late and there is definitely some
worry about sector rotation. Many of the high flyers-such as in
biotechnology and social media-are starting to face a modest
pull-back and concerns are growing that they are due for a
In light of this, it might be time to focus on a sector that is
seeing rising earnings estimates, and is well positioned to benefit
from current geopolitical realities. Aerospace and defense
certainly fits this bill, and any of the aforementioned picks could
be solid choices to play this trend in what is otherwise a very
uncertain market environment.
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HUNTINGTON INGL (HII): Free Stock Analysis
ISHARS-US AEROS (ITA): ETF Research Reports
WESCO AIRCRAFT (WAIR): Free Stock Analysis
SPDR-SP AER&DEF (XAR): ETF Research Reports
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