“We believe that while defense stocks may experience near-term softness going into the midterms, they should recover and enjoy a tailwind thanks to outlay growth through late 2018 and into 2019,” he said.
That volatility could be caused if there are gains made by Democrats in the House and Senate which, if they happen, could cause uncertainty about future defense spending.
“Although we see defense budget growth reversing in 2021-23 due to growing mandatory spending requirements…we believe strong moats across the defense companies we cover combined with their proven ability to weather defense cycles means that long-term investors will still be well served holding wide-moat defense stocks that trade at attractive valuations,” Higgins added.
Most A&D companies are squarely located in the United States, so they proportionally benefit from the tax cuts of 2018. On the negative side, the sector is a somewhat pricey, coming in over 47 times the forward price earnings.
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