I hope you didn’t lose faith in a big prediction I made at the beginning of last year.
I noted that the Trump defense buildup was going to be the biggest we’ve seen since President Reagan took office in January 1981.
But if you doubted my forecast, I can certainly understand why.
After all, in the days before the recent two-year pact over the federal budget, Big Media was filled with stories about how Trump was about to suffer a huge setback for his military goals.
I lost count of the number of stories I read predicting that Congress would force the president to cut back on his Pentagon plans.
So, I’m happy to report that the media was wrong and I was right all along.
When it’s all said and done, the $716 billion defense budget gets a nice boost that bodes well for the sector’s ongoing growth and earnings.
A Contrarian Take
I have to say I have an unfair advantage when it comes to analyzing media coverage. Strike that, make it two.
First, I’m an award-winning former newspaper reporter who did some of my best work by taking a contrarian approach. Time and again, I scooped the competition with page-one stories that flew in the face of the media’s herd mentality.
Second, my dad was the award-winning senior military editor for Aviation Week and Space Technology magazine, the bible of the industry. That’s how I ended up with a front-row seat to the Reagan defense investments of the 1980s.
And I have been paying close attention to Trump’s military agenda since he campaigned on a pledge to boost defense spending. Trump wants to increase the number of troops, ships and aircraft in the nation’s arsenal.
In that regard, he came out of the recent budget battles in overall pretty good shape.
Ramping Up Defense Spending
On Aug. 2, he signed the two-year $2.7 trillion budget deal that put off $126 billion in automatic spending cuts.
For the Pentagon and the nation’s defense and aerospace firms, it was very good news. Defense spending will rise by roughly $56.5 billion over the next two fiscal years.
Make no mistake. This will impact virtually every aspect of the Pentagon’s rebuilding after years of wars in the Middle East.
That’s why I think investors would do well to take a good look at the Invesco Aerospace & Defense ETF (PPA). This is a cost-effective ETF made up of proven defense and aerospace leaders.
What’s Under the Hood
The beauty of this ETF is that it positions you to profit from just about every aspect of the industry. With nearly 50 stocks in its portfolio, PPA includes aircraft makers, component suppliers, electronics and materials firms and much, much more.
While defense giants are a big part of the portfolio, we get exposure to smaller firms as well. Large caps make up roughly 61% of the holdings. But mid and small caps account for the remaining 39%.
Thus, PPA covers virtually every aspect of the Pentagon’s plans. I’m talking about such firms as:
- United Technologies Corp. (UTX). The firm recently announced it’s merging with another sector giant, Raytheon, in a 57-43 ownership split. Renamed Raytheon Technologies, the new firm will be the nation’s second-largest aerospace unit. It combines two firms with a rich history of innovations. United Technologies transmitted the first photo via satellite and received the first GPS signal. Raytheon invented the microwave oven and the Patriot missile.
- Hexcel Corp. (HXL). A supplier of advanced honeycomb composites, the small-cap firm counts the Boeing Co. and arch rival Airbus SE as key clients. Hexcel will be a key supplier on roughly 7,230 Airbus planes and roughly 5,720 for Boeing. Over the next eight years, production for those two firms alone gives Hexcel an order backlog worth about $9 billion. In defense, it’s a supplier for the F35 fighter jet for the U.S. and NATO along with the European Fighter Aircraft known as the Typhoon.
- Axon Enterprise Inc. (AAXN). This stock shows the broad range that PPA offers. The firm makes the non-lethal TASER stun gun used by dozens of law enforcement agencies here in the U.S., and a growing number of foreign ones. It also make police body and dash cams and supplies cloud computing services for evidence files. Militaries across the globe are also stepping up their purchases of TASERs and related devices. That leads to more apprehensions and fewer casualties in direct combat situations.
- Mercury Systems Inc. (MRCY). The firm specializes in making plug-and-play subsystems for large defense contractors like Boeing. It has deep expertise in making advanced air-defense gear, and supplies products on more than 300 defense programs. For instance, it supplies sensors for the F35 fighter and signal processing systems for the Aegis class aircraft carrier. Mercury’s sensor systems also play a critical role in the armed surveillance Predator and Reaper drones.
As you can see, with this one investment we benefit from the entire sector’s growth. That also reduces the risk associated with investing in just one stock at a time when the markets remain volatile.
Thus, I believe PPA is and cost-effective way to invest in virtually every aspect of the Trump defense boom. Trading at about $166.50, this ETF has greatly outperformed the broader market so far this year.
Since the market rebounded last Dec. 24, the bellwether S&P 500 is up 24.7%. But PPA did 74.5% better, with a 42.7% advance.
This is the kind of foundational play that lowers your risk of buying individual stocks, while at the time really building your net worth.
And you’ll find over time that this is exactly the type of solid base that keeps you driving smoothly down the road to wealth.
Of course, while you build out your base, you may also want to take a look at a revolutionary new technology that’s already being used by the U.S. military and trauma and cancer centers around the world.
It could save over two million lives.
And a tiny biotech holds the key to developing this technology.
Cheers and good investing,
Michael A. Robinson