David Hay — Trading Alert (Re-post): Lockheed Martin (LMT)

The re-post — Ringside Access alert of Jul 9, now to the paid tier

• A re-post of the Trading Alert "that went out to our Founding Members (Ringside Access) on July 9th" (upgrade pitch: see them "a couple days earlier"). Not about energy this time — though Haymaker is "definitely pleased by the snazzy snap-back with oil and oil-related stocks of late."

The setup — a decade-long uptrend that flat-lined four years

• LMT, "a former highlighted name," has been in "a steady, albeit unspectacular, up-trend over the past decade," punctuated by the sharp corrections that have followed Russia's attacks on Ukraine — and this year, "the allegedly resolved U.S./Israel war against Iran."
• Haymaker is "very skeptical… that peace has enduringly broken out in the Persian Gulf" — recent events validated both that and its "highly contrarian bullish stance on oil."

The mispricing — the oil template applied to defense

• "Similar to our incredulity about oil trading in the upper 60s last week, despite a massive supply shock, we're also bemused by the fact that LMT has essentially flat-lined over the past four years" — despite "a couple of breakouts above prior resistance and healthy upside follow-throughs."
• Bears on defense stocks, and LMT in particular, have "adopted a similar attitude toward this group as they did with oil: basically, the shooting war is in the rear-view mirror. Therefore, why hold U.S. defense stocks?"

The valuation — 17× clean earnings vs the S&P's 21× inflated ones

• The bear attitude has LMT "trading at one of its lowest Price/Sales and P/E ratios of the past decade. Its P/E is now just 17, compared to the S&P 500 at 21×."
• Earnings-quality kicker: LMT's earnings "aren't inflated by extraordinary items" — unlike S&P heavy hitters "like Google… recording massive non-recurring gains on investments in private companies (many of which are also their customers)."

The track record — accumulate weakness, realize gains into strength

• "Over the years, we've done a decent job of suggesting accumulation of LMT on weakness and gain realization into strength" — clearest trim October 2024 around $600; most recent positive highlight last September at roughly the current price. Self-critique: "we should have proposed an additional trim when it rocketed to near $700 shortly thereafter."

The drone knock — and the Patriot counter

• The bear knock: US high-tech, high-cost weaponry "has disappointed in New Age warfare" — drones are "the stars of both the Ukraine and Iran conflicts," a shift Haymaker anticipated in its April-2022 "Send In The Drones" piece (with Louis-Vincent Gave).
• The counter: "right up there with drones has been the exceptional performance of the Patriot missile defense system (MIM-104)" — one of LMT's most important programs. Ukraine "has expended nearly all of its Patriot inventories" (and may try to produce domestically — hard, given the complexity); "the Patriot shortage is a global problem, even in the U.S. Consequently, production of these life-saving systems is nearly certain to be strong for years to come."

The demand backdrop — surging global spend, few scaled suppliers

• Defense spending "is surging around the world." Some goes domestic (especially Europe), but "non-U.S. defense companies are comparative newbies when it comes to producing sophisticated weapons systems, particularly at scale" — the exception being China, whose CCP ties make most buyers "hesitant… to buy critical defense components."

The pivot — Ultra Maritime and next-gen armaments

• Big US contractors will probably "pivot toward next-generation armaments like drones, both aerial and marine-based." LMT "just announced the acquisition of Ultra Maritime, a fast-growing naval defense (and offense) technology enterprise," and "it won't be a surprise if it seeks to acquire Ukrainian drone producers."

The risk-line — 4.6% on the 10Y / 5% on the 30Y

• The "highly disruptive" risk: "a decisive break above 4.6% on the U.S. T-note and north of 5% on the 30-year T-bond" — a signal of "an inability for America to continue living, and spending, beyond its means, including on 'defense' (lately, that seems to have become a euphemism)."

The bottom line — bullish, ATH north of $700 "highly likely"

• "At an undemanding 17 times earnings, we are bullish on this name. Another run-up, possibly to a new all-time high north of $700, strikes us as highly likely." — "one of the USA's finest defense contractors, a company that has, for decades, been a linchpin of Pax Americana."