We all know what a lousy winter this has been. So if you’ve been doing any traveling, I’m hoping you haven’t been victimized by one of the 75,000 commercial flights that the nation’s airline industry has scrubbed since Dec. 1.
That’s the industry’s worst showing in 25 years, says The Associated Press.
As a frequent flier myself (I rack up some serious travel miles jetting from one CEO meeting to another, and then onto one of my media appearances on CNBC or Fox Business), I feel real empathy for those of you who’ve been stranded in a cold, uncomfortable airport terminal.
But when I saw these statistics, I knew there was a bigger story at play here – a story with the kind of financial heft that spells profits for investors who are savvy enough to zero in. Because this story has yet to hit Wall Street’s radar screen, you have the chance to score major outsized profits.
And in today’s Strategic Tech Investor, we’re going to show you how …
Flying the Friendly (Crowded) Skies
The world’s aviation sector is experiencing one of the greatest booms in in the 110-year history of flight. Indeed, the fact that we’ve seen so many flight cancellations in recent months gives you an idea of how many flights are actually on the schedule.
There’s just no question that the world’s skies are getting a lot more crowded.
The International Air Transport Association (IATA) – a trade group that represents 240 airlines – says the 5.2% increase in global demand last year was part of a long-term trend it labels as “historic growth.”
The IATA didn’t disclose the actual number of flights or total number of passenger miles flown. But it did say that every major region in the world saw an increase in flights in 2013.
And the skies are destined to get even more crowded.
Here in the United States, for instance, passenger traffic is projected to soar 50% in the next 10 years – zooming from 750 million today to 1.2 billion, the U.S. Federal Aviation Administration (FAA) said in its latest forecast.
No wonder there’s so much demand for new commercial jet airliners.
A Flying “Ecosystem”
Look at what’s happening with the U.S.-based Boeing Co. (NYSE: BA) and Europe’s Airbus Group (OTC: EADSY). Together these industry giants now have a backlog totaling 10,000 aircraft. At current production rates, the two companies say it will take roughly eight years to build all those jets.
And that doesn’t count the new orders the companies expect to get each year.
For tech investors, this represents the kind of substantive trend that can generate long-term profits. And unlike other, more-esoteric tech opportunities, the aviation book is easy to see and understand.
That’s because so-called “Jumbo Jets” – the backbone of most global carrier fleets – are like aerial high-tech ecosystems.
We’re talking about such diverse bits of technology as avionics, onboard computers, semiconductors, sensors, digital radar, communications systems and flight-control units – all made to work together and then wrapped in a flyable cocoon constructed of such “Miracle Materials“ as advanced composites or new forms of aluminum.
That’s quite an investment menu – meaning we have a broad array of stocks to choose from. That makes for some tough choices.
But there’s one profit play that gives us access to all those options – all at once.
Having it All
The investment that I’m talking about is the iShares U.S. Aerospace & Defense Fund (NYSE: ITA), an exchange-traded fund (ETF) that gives us the broadest-possible access to the defense/aerospace sector.
Don’t be turned off by the fact that we’re talking about an ETF here: This is a top-performing investment vehicle. Over the past year, the fund gained 52% – more than double the 21% return generated by the Standard & Poor‘s 500 Index.
With nearly 40 stocks in its portfolio, the ITA ETF boasts some of the top innovators in aviation – companies that also offer consistent, predictable profits and cash flows. I’m talking about such companies as:
- Boeing: This No. 1 U.S. commercial aircraft maker is a profit powerhouse. With a market value of $97 billion, the firm recently increased its quarterly earnings by 28%. The return on equity (ROE) is a hefty 43% and free cash flow (FCF) is $3.2 billion.
- United Technologies Corp. (NYSE: UTX): This pioneer in such key aerial technologies as high-performance radial engines and helicopters also key flight-gear elements as aviation-control systems, power-management systems and jet engines. With a market cap of $104 billion, it has operating margins of 14% and an ROE of 20%. Though earnings were off last quarter, UTX last year threw off $5 billion in free cash flow.
- TransDigm Group Inc. (NYSE:TDG): This builder of airframe segments, cockpit-security components and audio systems has a $9 billion market cap, an astonishing ROE of 172% and operating margins of 40%. Earnings grew 16% in the most recent quarter, and last year generated FCF of $322 million.
A great story, to be sure.
But there’s more.
In addition to the soaring commercial aviation business, this ETF also has major holdings in the defense sector. In fact, the split is close to equal, with 55% commercial and the remaining 45% defense.
You may hear that and be instantly turned off – reasoning this is a lousy time to invest in defense stocks.
But that’s not necessarily true.
While it’s true that the Pentagon is caught in the middle of Washington’s two-party fiscal fights – and faces some lean budgets – the investment story is much more complex than that.
As someone who grew up in a military household, I have to disagree with that assessment.
Let me show you why …
From the Halls of Montezuma
My Dad is a retired U.S. Marine Corps officer who went on to become an award-winning military-technology editor. He taught me a lot about how to “read” key defense trends.
Over the last 20 years, I’ve used what my Dad taught me to uncover some of the biggest profit plays in defense-technology.
As part of that work, I regularly speak to senior sector leaders. Two major themes have emerged from those talks.
First, many of these execs are students of history – and know that every major conflict, such as the U.S. incursion into Iraq, is followed by a period of cutbacks.
The best firms – such as those contained in the defense portion of the IT ETF – anticipated those cuts, and made adjustments.
For proof, you can see that this fund holds several major defense firms whose stocks have gone on a tear over the last year. Take a look:
- Lockheed Martin Corp. (NYSE: LMT): Well known for making military aircraft, this company also supplies combat ships and ground vehicles, as well as advanced radar and tactical communications. LMT has a $52 billion market cap, 10% operating margins and an incredible return on equity of 119%. Over the past year, the stock has generated an 85% gain for shareholders.
- Northrop Grumman Corp. (NYSE: NOC): The company has a wide spectrum of operations that cover everything from advanced sensors to missile-defense systems. And it’s even getting involved in cybersecurity. With a $26 billion market cap, NOC has a 19% ROE. The shares have gained 83% over the past year
- Raytheon Co. (NYSE: RTN): Another full-spectrum firm , Raytheon made a name for itself in the first Gulf War as the maker of the vaunted Scud-Killing Patriot Missile. Raytheon gives the Pentagon capabilities for electronic warfare, laser rangefinders, military training and advanced radar. RTN has a $30 billion market cap, a 20% ROE and 12% operating margins. The stock has gained 77% over the past 12 months.
These big-cap firms are “must-have” stocks. But the ETF we like also holds some exciting small-cap personal-defense firms.
Sturm, Ruger & Co. Inc. (NYSE: RGR) is a leading maker of firearms for individuals and police agencies. TASER International Inc. (NasdaqGS: TASR) is best known for its nonlethal electroshock weapons.
When it comes to the aviation-and-defense sector, the ITA ETF is one of the best vehicles I’ve found to play the leaders, while also capitalizing on some of the newest emerging trends and companies that we expect will play out.
Trading at about $107, this ETF is actually cheaper than many of the big names it holds.
Not only that, but it’s a great way to own a several dozen of the sector’s most-exciting companies and stocks – without the stressful demands that holding individual stocks usually entails.
It’s also the kind of “foundational play” that can serve as bedrock on which to build – and create meaningful wealth in your future.
See you later this week …
[Editor‘s Note: After the great response we received from you on the “foundational“ mutual-fund and ETF strategies we detailed in the prior two Strategic Tech Investor columns, we thought we‘d expand the concept to include a high-growth profit play like aerospace. Let us know how you liked it. And please share any success stories!]