Calm amid the stormNorthrop Grumman is attractive

Published 24 February 2009

Northrop Grumman is in a good position, as they really only need to perform as “average” to deserve a higher stock price appreciation; as the worst performing of the “big” defense contractors in 2008, it should be the year for a turnaround at Northrop

George Bernard Shaw said that “Youth is wasted on the young.” Well, not always. Here is a case in point. Jim Regan is a sophomore undergraduate Finance student at Penn State’s Smeal College of Business. Jim specializes in the industrial sector of the market through, the financial community of which he is the co-founder. He recently offered a very good analysis of why the defense sector is going to emerge largely unscathed from the current economic slowdown, an analysis in which our readers should be interested.

With the S&P Industrial sector down 38.5 percent for 2008, investors have for the most part steered clear of this manufacturing-driven area of the market (the latest Economist’s cover story: “The Collapse of Manufacturing”). . Jim Regan writes in Seeking Alpha that many made the mistake of overweighting industrial companies on a valuation basis in the fall of 2008, and major losses were incurred as a result. “Now, in the new year, is the global picture really as bad as it has been made out to be?” he asks, and answers: “I believe the answer is ‘probably not,’ and encourage you to consider industrial companies in 2009.”

What strengths are present in industrial companies for the coming year? As we continue to receive downcast readings from economic indicators like the ISM Manufacturing Index, Construction Spending reports, and Durable Goods orders, it becomes difficult to trust much of anything. There is a silver lining, though: as international governments begin to accelerate programs encouraging projects in infrastructure spending and energy efficiency, the direct beneficiaries are industrial companies.

When investors stick to companies with strong cash flows and resilient order backlogs, I believe that there are major profits to be made from historically low P/E ranges across nearly every industry within the sector,” Regan writes. Accounting for additional federal stimulus and re-initiated spending plans, there is every reason to believe that several major investment themes will exist in the industrial arena; for 2009, Regan sees strength in defense, engineering and construction, logistics, and energy efficiency.

Northrop Grumman
One of Regan favorite investment themes for 2009 is in the defense sphere. As opposed to aerospace, which is still largely cyclical and volatile, the defense thesis follows a global arms race that is without a doubt taking place. One thing to remember is that as the global economy worsens, we typically see more geopolitical tensions arise, not fewer. “When we see events like Russia supplying Iran