There may be many casualties from the potential fiscal cliff, but no group will feel more pain than defense companies.
Regardless of coming up with a ‘grand bargain’ or the already-agreed-upon spending cut this sector will be chopped heavily. After a very long period of two wars, re-stocking weapons, materials, planes, drones and ships; the next cycle is likely to be a downer for firms like Lockheed Martin, Northrop Grumman, Boeing, Martin Marietta and L3 (to name a few). The potential down-sizing of the military will mean fewer purchases going forward. Large budgets will be the low-hanging fruit for Congress and the President to cut from future spending.
For the better part of the last decade these stocks have been among the leaders. Most are high dividend payers, which may also be another casualty if higher taxes are seen from the fiscal cliff.
Diversification is key, and the best one in this group is Boeing. The Dow stalwart not only has a big presence in defense but is also big in aerospace and airplane construction. Spreading the wealth to different areas has historically proven beneficial in dampening volatility when defense cuts are considered.
A good trade over the long term would be buying Boeing longer term calls or just picking up the stock around 70. It has been one of the best performers in the Dow 30 this year and should continue to be for the foreseeable future.
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[Editor’s note: How are you trading the Fiscal Cliff? What opportunities (long or short) do you see with the current uncertainty on the spending cuts/tax increases? Let us know below!]