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Can we ID Lashmet’s “Defensive Gambit” Stocks from the Stansberry Venture Technology Ads?

Pitch says these are "Seven Inflation-Beating, Profit Reaping Stocks to Own in 2023" -- Thinkolator can ID Three, and We'll Guess at the Other Four

By Travis Johnson, Stock Gumshoe, February 23, 2023


A new ad for Dave Lashmet’s pricey Stansberry Venture Technology caught my eye this week, they’re doing a quick push for subscribers for that high-end newsletter (“list price” is $5,500, though they usually only promote it when it’s “on sale” — they’re selling two years for $2,500 currently, no refunds). In the past, Lashmet’s pitches have mostly been for companies in biotech and medicine (lots of cancer-killers and obesity cures), though he has squeezed in quite a few regular tech stocks as well… this time, it’s all about defense stocks.

Here’s how the tease describes what they’re offering:

“The Defensive Gambit: Seven Inflation-Beating, Profit Reaping Stocks to Own in 2023

“National security doesn’t slow down because of inflation or market returns.

“War in Ukraine is still raging.

“Tensions with China are on the rise and defense technology is proving more important than ever.

“And Dave’s recommending seven defense-industry stocks set to profit this year – no matter what the overall market does.

“These are companies with some of the best defense technology today – and plenty of potential upside ahead.”

It’s hard to argue with the big picture argument — even with a federal budget that is obviously ridiculous, it’s been a long time since any politicians really tried to push cuts to defense spending (the tacit agreement over the past decade has been that the Democrats let the Republicans increase defense spending just as much as the Republicans let the Democrats increase social spending, with both pretending that we don’t have to worry about where the money might come from)… and any fiscal discipline that leads to big defense cuts seems even more unlikely when both Russia and China loom as threats, even with US defense spending still about 3X higher than any other country in the world (US military spending is roughly 35% of the global total spending in that area, second place is China at 14%… everybody else is essentially a rounding error, though if you group the non-US NATO countries together they would be well over 10%).

Here’s how the ad puts it — it’s for Lashmet’s newsletter, but it’s actually signed by publisher Brett Aiken (don’t want those pundits to have to get their hands dirty with selling).

“Spy balloons… energy shortages… Russia’s saber-rattling… Chinese aggression… the signs are all around us.

“There’s no question that money will continue to pour into the defense industry in the coming months and years, no matter what’s happening in the overall market.”

So what is it that Lashmet is recommending these days? Here’s how the ad sums it up…

“Three of the largest, most established names in the defense sector…

“Firms with tens of billions of backlogged orders….

“Despite their size and stability, all three could double or triple in value in the coming years….

“He’s also recommending four smaller companies with far more near-term potential for you.

“These companies are responsible for the critical, core technologies driving the revolution in defense tech.

“And that’s why we believe these recommendations could be among some of the most highly rewarding picks he’s ever made… with each of them capable of exceeding his record closed trade of 1,466%.”

It looks like they’re not dropping any hints about these four “smaller companies” this time out, so I’ll just throw out some speculation for you in a minute about those… but we do, at least, get some hints about the big three, and they were kind enough to include some long-term charts so we can give you some answers there…

“All three of these large companies have doubled in value multiple times already in the 21st century…

“And they anchor the strategy I’m sharing with you now.

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“Company #1 is up as much as 1,317% so far since the year 2000”

That’s General Dynamics (GD), which builds M1-Abrams tanks, nuclear submarines and destroyers for the Navy, and also Gulfstream business jets, making this the one of the three here that has a meaningful non-defense business, though Gulfstream is a pretty small part of the company (they’re not nearly as evenly divided between civilian aerospace and defense as Boeing (BA) is, for example). Currently trades at about 18X earnings, with a 2% dividend yield (last dividend increase was only about 5%, it grew about twice that fast for most of the past decade), average five year earnings and revenue growth of about 5%.

Next?

“Company #2 is up as high as 3,181% over the same timeframe”

The chart they provide for this one is a match for Northrop Grumman (NOC), which we talked about in some detail when Joel Litman was pitching a defense stock earlier in the week (readers have since told me that Litman was actually recommending Lockheed Martin, despite the fact that Northrop Grumman matched his clues better… can’t confirm for sure either way, one reason the Thinkolator sometimes can’t be 100% certain).

Northrop Grumman is big in aerospace, like Lockheed they’re part of the F-35 program and have been prime contractor for some stealth bomber projects, including the big new B-21 program, along with drones, missiles and missile defense and the like, and they’re actively involved in space, too, with some rocket and satellite programs. They trade at about 15X trailing earnings (20X forward), with a dividend of about 1.5% that grows about 9% a year, and earnings have averaged growth of roughly 14% in recent years (revenue has grown a little more slowly, about 7% a year).

Next?

“And since 2000, Company #3 is up as much as 3,735%”

That one matches Lockheed Martin (LMT), which is also hinted at with this language, later on:

“The first defense company Dave ever turned his readers on to, and one he believes still has incredible short-term potential today, has a market cap of well over $100 billion…

“It’s an incredibly stable entity.

“And yet, it’s doubled in value multiple times in the last 10 years alone!”

(That one happens to be an easy match for Lockheed Martin, there are only a few publicly traded global defense contractors with market caps above $100 billion — Raytheon (RTX) and Boeing (BA) are the others, neither of which has done anywhere near as well as LMT recently).

Lockheed has had the fastest-growing earnings of the defense titans in recent years (averaging about 26%, though revenue growth has only been about 6%), trades at a pretty average PE ratio (forward PE 18), and pays the highest dividend in the bunch (2.5%, growing at about 7% a year recently). Hard to argue with it if you like the defense industry in general, their real prize is the F-35 program.

And Lashmet seems very focused on those big, long-term weapons programs that generate profits for decades…

“The B-52 bomber for instance has been in use for 70 years.

“The M1-Abrams tank started coming off the assembly line in 1979… and it’s still in production!

“And the F-35, America’s unparalleled next generation fighter which entered service recently, is expected to be the cornerstone of the U.S. and its allies’ aviation defense until at least 2070.

“Dave’s only targeting companies with these kinds of ‘hidden’ assets – backlogs which are coming over the horizon and could ultimately lead to further doubles and triples…”

So that makes sense, the next-generation bomber, the stealth B-21, is made by Northrop Grumman… the F-35 by Lockheed Martin… and the M1-Abrams tank by General Dynamics. Those are pretty durable “franchises,” I guess, though it’s also true that there’s often a huge amount of collaboration among the defense contractors — to a large degree, most of them are involved as subcontractors or suppliers or partners on many of the big-ticket contracts (NOC makes part of the fuselage for the F-35, for example). Being the prime contractor is a big deal, Lockheed sells those F-35s around the world to U.S. allies for close to $100 million each, but the money does get spread out to subcontractors, too, many of which are private and small.

How about those other four? This is pretty much all they say in the ad:

“In addition to three super secure blue-chip defense companies, which could double or triple in value in the coming months… before potentially snowballing far higher…

“Dave’s also recommending four of his favorite small companies in this sector…”

We don’t get any real clues about those smaller companies, so I’ll offer up some interesting candidates for you to consider… and yes, these are guesses, based on the indications we get about the kinds of stocks Lashmet likes and the relatively small universe of relatively “pure play” defense contractors.

I wouldn’t be surprised if Lashmet likes Huntington Ingalls Industries (HII), though I’m quite biased because that is the only defense contractor I own right now — they’re not growing as fast as the others, but they essentially have a monopoly on the construction and maintenance of aircraft carriers in the United States, and are also very active in a couple nuclear submarine programs. They have been through a little bit of a financial restructuring, and should generate some good free cash flow growth in the next few years, though they haven’t recently grown their earnings in very lusty fashion — the reason to buy this one is the extraordinary stability of the franchise, and the very high likelihood that any rising conflict with China is going to put even more of a spotlight on the Navy’s big carrier groups. HII was spun out of Northrop Grumman about a decade ago, and is quite small, with a market cap around $8 billion — they have some other businesses, including a smaller shipyard in Mississippi and some non-naval defense consulting work with the government (mostly from buying Alion a couple years ago, a move to diversify a bit), but the primary driver is the massive Newport News Shipyard and its carrier and submarine businesses.

Other potential plays could include Aerojet Rocketdyne (AJRD), the leading pure-play engine maker for missiles and rockets, though that one has been mired in an ugly board fight and a failed takeover (by Lockheed Martin) last year. Their numbers don’t look great right now, the valuation is high and growth has been “meh,” but they do have a strong “story” behind them, as the world replaces all those small missiles being fired in Ukraine and fuels the ongoing corporate space race.

Also sort of in the “engine” space is BWX Technologies (BWXT), which builds and services many of the reactors that power the nuclear navy, as well as potentially mini-reactors for military bases if those programs move forward. This is somewhat like the HII pick, since servicing and refueling those reactors for nuclear vessels is a specialized and not terribly competitive business, they’re also not a fast grower of late but are similarly valued to HII, and should have every opportunity to have a steady slice of the US defense budget for a long time.

He might also like Kratos Defense & Security (KTOS), which looks a little more reasonable now that it has come down a bit from a nutty valuation a couple years ago. This is a much smaller name, market cap only about $1.4 billion, and they have sometimes grown much faster — they get touted every now and again for some of their smaller programs, including their slice of the hypersonic missile business and some work on a new stealth drone platform called Valkyrie. They’ve built out their tactical drone business quickly, when I looked at them a few years ago they were mostly a target drone maker, which is still a pretty big (if less exciting) business, and they’re also active in satellite systems, including ground systems and satellite tracking, and in microwave electronics. They’re expected to report their fourth quarter numbers this afternoon, so the story could change pretty quickly. If you like that space in general, Aerovironment (AVAV) is also still small, and remains a big player in the unmanned/drone business, though the valuation is a bit more challenging.

Or perhaps Textron (TXT), with the rationale there being that the Bell Valor, from Textron’s Bell Helicopter, won the contract for the future replacement for the Army’s Black Hawk helicopter, so that could be a standard-bearer of a product for decades (though as with many big programs, the recent decision is being protested by Sikorsky (owned by Lockheed now) and Boeing, who were working together on the helicopter that didn’t win the contract — Sikorsky is the prime contractor for the current Black Hawk. Textron is about a $15 billion company with pretty solid growth in recent years, and with a rational valuation (about 15X forward earnings) — and it’s a fairly diversified industrial company, their other big businesses are civilian aircraft (Cessna and Beechcraft and more Bell helicopters), military drone aircraft, flight simulators and a variety of specialized non-military stuff (auto parts, golf carts, etc.). To give yet more perspective on the long term “franchise” value of these big programs, and the long time frame, this contest to replace the Black Hawk officially started in 2019… and the Black Hawk itself was initially selected in a competition that started during the Vietnam War, with the first one going into service in 1979 (replacing a Bell helicopter, coincidentally, that one was named the Iroquois).

Who else?

The two best companies in aircraft maintenance and aftermarket parts replacement, at least in my opinion, are probably not on Lashmet’s list, they always look awfully expensive (which is why I’ve never been brave enough to buy), and they’re not particularly overweighted to the defense market or likely to win lucrative subcontractor slots on splashy programs like the B-21 or F-35, but they’re good companies anyway… that would be TransDigm (TDG) and HEICO (HEI), two of the more consistent “skin in the game” companies in aerospace that have kept strong and steady profit margins for a long time. Who knows, a slice of the defense department’s aerospace spending could eventually trickle down to those two…

… or to Curtiss-Wright (CW), which has caught my eye recently. It looks to me like CW has been trying to catch up with TDG and HEI as an aircraft parts/services supplier, to some degree, with big improvements in efficiency, so maybe it can earn a higher valuation that way — and CW does also have some meaningful defense exposure, including a lot of work on propulsion systems for the Navy and some defense electronics projects, so they’re locked in on some defense programs as well that might fall under that “hidden” category. All told, they’re more than 50% “defense” as a percent of sales, and defense has also been the fastest-growing part of the business.

Another one I’ve been interested in recently is a European defense contractor, Leonardo (LDO in Italy, FINMF or FINMY in the US), they have a good position in NATO defense products, particularly in helicopters, and also own a chunk of an appealing German defense technology company (25% of Hensoldt).

Others that are worth a look across the pond, where spending might reasonably be expected to accelerate even faster, might be BAE Systems (BA in London, BAESY or BAESF OTC in the US), Rheinmetall (RHM in Germany, RNMBF or RNMBY OTC in the US), Dassault Aviation (AM in Paris, DUAVF OTC in the US) or Thales (HO in Paris, THLKY or THLEF OTC in the US). Thales and BAE Systems are pretty big, with market caps in the $30 billion range… Dassault Aviation is about half that, and the rest are quite a bit smaller ($6 billion for Leonardo, $11 billion for Rheinmetall).

And it could be something out of the traditional “defense contractors” world, too — maybe he’s re-pitching Skywater Technologies (SKYT), which he touted as “The Pentagon’s Chipmaker” a couple years ago (unlike most commercial products, defense contractors can’t generally use chips from China, at least on sensitive or advanced projects, which supports some relatively small US companies in this space). That would actually make a lot of sense, but he doesn’t hint at anything like that in the ad… so that’s “guessing” too.

No real way to narrow it down in the absence of clues from Lashmet about those smaller stocks, sadly, but I’ll throw out the guess that he’s pitching BWXT, KTOS, CW and HII… with TXT almost making that top four. Please don’t take that as anything more than a guess… I’m sure about the “big three” we went over at the top, but not at all sure about these.

Which means it’s time to turn it back to you — it is, after all, your money we’re talking about. Have any interest in investing in the next wave of defense-deterrence spending, or any favorites in that space? Let us know with a comment below.

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Richard VEDDER
Richard VEDDER
February 23, 2023 9:50 am

Would you be able to mention an ETF that holds some of these suggestions?

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Richard VEDDER
Richard VEDDER
February 23, 2023 2:13 pm

Thank you

Lorne
Irregular
Lorne
February 23, 2023 10:11 am

Are there any good Defense stock ETFs or mutual funds that you would recommend?

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Mark
Member
Mark
February 23, 2023 10:37 am
Reply to  Lorne

Lashmet doesn’t like ETFs because you get both good and bad companies. You can listen to his interview on the Stansberry Investor Hour. He does reveal $NOC was one of his picks forsure on there. He mentioned he doesn’t like companies that have too much debt, especially with rising rates.

But $ITA is a decent defence ETF, and $XAR is an equal weight defense ETF, which has outperformed $ITA over the long term, but $ITA, which is market cap weighted, has outperformed over that last year.

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Dave
Member
Dave
February 23, 2023 10:21 am

Not a mention of RYCEY?

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JOHN WESTFIELD
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JOHN WESTFIELD
February 23, 2023 11:45 am

I am most interested in who is making the best fighter drones. Can you offer any insights into that?

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thomas
Member
February 23, 2023 4:12 pm

John: I have been in the military Aerospace Engineering industry for over 40 years.
Travi is correct that the current “Fighter Drone” in testing is the Kratos Valkrie which can fly at speeds close to mach 1 the airforce currently has a contract with kratos for 2 and is currently in test. General Atomics is the major player in Drones. Kratos has been a takeover candidate forever. Hope this helps. By the way General Dynamics biggest ptograms are both the Columbia and Virginia class subs.

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JOHN WESTFIELD
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JOHN WESTFIELD
February 24, 2023 1:47 pm
Reply to  thomas

Thanks. Looks like Gen Atomics is a private company, but I did buy KTOS yesterday before earnings. Wohoo!

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JOHN WESTFIELD
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JOHN WESTFIELD
February 24, 2023 1:43 pm
Reply to  JOHN WESTFIELD

I bought 1000 KTOS yesterday after reading your reply & noticed their earnings would be released after the market close. That made me even more enthusiastic. Shares are up 14% today! Thanks.

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JOHN WESTFIELD
Guest
JOHN WESTFIELD
February 24, 2023 1:44 pm
Reply to  JOHN WESTFIELD

I bought 1,000 KTOS yesterday after reading your reply & noticed their earnings would be released after the market close. That made me even more enthusiastic. Shares are up 14% today! Thanks.

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dowdylama
Irregular
dowdylama
February 23, 2023 7:47 pm

CW seems best positioned here – ‘though I think GFS and SKYT are a better bet, in a closely-related arena.

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Hugh108
Hugh108
February 23, 2023 10:43 pm

Personally, I don’t feel good about investing in companies that make military equipment such as guns, bombs, fighter planes, etc. However, I’m glad that Western countries are supplying Ukraine with arms, and I feel happy when I hear that Ukrainian soldiers have destroyed some Russian tanks and killed some Russian soldiers. I’m glad that the Ukrainians are winning the war against Russia, and I know they couldn’t do that without the help of arms and military equipment from Western countries. So I’m a bit confused. I don’t like investing in things which I consider immoral, and basically I’m a pacifist, but I totally support the Ukrainians in their fight against the Russkies.

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andrew g simpson
February 24, 2023 5:40 pm

Why isn’t eslt a part of this conversation??

erug
Member
erug
February 25, 2023 2:22 pm

Just a word about AJRD Halper Sadeh LLC, an investor rights law firm, is investigating the following companies for potential violations of the federal securities laws and/or breaches of fiduciary duties to shareholders relating to:

https://mma.prnewswire.com/media/1896150/Firm_Logo_with_Investor_Law_Firm_Logo.jp
Aerojet Rocketdyne Holdings, Inc. (NYSE: AJRD)’ssale to L3Harris Technologies for $58.00 per share. If you are an Aerojet shareholder, click here to learn more about your rights and options.

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