Finding Value in the Aerospace and Defense Sector

Stocks are getting pummeled left right and center in this market, and the aerospace and defense sector is no exception. Table 1 shows significant downside movement from the 52 weeks highs for a few ETFs and market index in this specialized sector.

Table1: % Price drop from the 52 week highs in the Aerospace and Defense sector

My question is, how do we find value with individual stocks in this sector? In my opinion, a cheap stock equates to one that is trading at a price below its intrinsic value. One way to find those companies is to start looking for stocks that have been oversold, are currently out of favor with the market or are just generally being overlooked. Essentially, we want to look at stocks that are not behaving price efficient and as discussed here, its reasonable to start looking at small cap stocks. Table 2 shows what has happened to some of the small cap companies in the aerospace and defense sector.

Table 2: % Price drop from the 52 week highs for some small cap Aerospace and Defense stocks

Looking over the sample of selected small cap stocks, we observe some extremely sharp price drops from the 52 week highs and this might be an indication of value. However, a relatively low price alone doesn't equate to value. The value comes from a low stock price relative its intrinsic value. One way to find potential value is to look at value indicators, such as price to earnings or price to book values. I have calculated the price to book values for our small cap aerospace and defense companies in the table 3.

Table 3: Price to book for small cap Aerospace and Defense stocks

 

 

We see from table 3 that the company with the largest price drop from its 52wk high (VSPC) is not trading at the lowest price to book value, indicating that price movement alone is not always indicative of value.

 

We also observe 4 companies in the aerospace and defense sector (highlighted in green) that are trading at prices below their current book values! These companies are probably a great place to look for bargain prices by doing intrinsic value calculations and comparing them to the market prices.

Comments

[papita]

anyone who writes an article and mentions, even lists Arotech, must be sent from heaven. I have owned this stock for 4 years, lost almost all of my investment and the only time I ever heard it mentioned was when they reported earnings. it was always some sort of disappointment. to be honest, I thought I was the only shareholder left. Although they seem to get contracts from the military at a regular rate, they just can't seem to make any money. Maybe the whole company is a scam. Since they move around so often, maybe they are a front for a prostitution ring. anyway, thanks for the mention.

[Reyer]

Hi Papita,

I'm glad this article worked out for you. I'm not actually a shareholder of any of those companies at the moment but I am starting to looking closer at the low P/B stocks. You might be interested in some of the follow up articles I plan on doing with those stocks. Eventually I will do complete intrinsic business valuations those companies.

Cheers,
Reyer.

[Lyndora]

I been in the military for 26 years, I consider myself savvy with understanding the underpinnings of the Defense side of the business. I have not heard of one of these companies in any recent "sustaining" business news. They are cheap stocks because they are not "in the game". Good article, but I would stick to buying quality companies getting press headlines! MHO.