With a war currently on in Ukraine, and the United States pumping cash and resources into it like crazy, you’d think defense stocks like Lockheed Martin (NYSE:LMT), Raytheon (NYSE:RTX), and Northrop Grumman (NYSE:NOC) would be on top of the world. That’s not the case, as all three are down in Friday’s trading. What happened to all of these companies to send them down in wartime, no less? A downgrade from Goldman Sachs (NYSE:GS) hit each of them.
Previously, Goldman had a “Neutral” rating on Lockheed Martin but cut it down to “Sell.” The stumbling block? According to analyst Noah Poponak, Lockheed Martin doesn’t have a lot of room to engage in stock buybacks, which limits its potential. Raytheon’s hit from Poponak took it down from “conviction buy” to “neutral,” thanks to its limited range for commercial aircraft. War may be good business, but so is peace.
Finally, Poponak’s swing at Northrup Grumman focused mainly on valuation issues. It’s currently at the high point of its historical value. That makes a downturn more likely, prompting a downgrade from “Neutral” to “Sell.”
Further, there are also macroeconomic issues to consider. U.S. debt is on track to once again hit the legally-installed limits soon. A hit to defense spending may come out of the Speaker of the House race and make matters worse. That could mean trouble for defense stocks as well. Poponak noted that investors have already factored in the impact of a “global geopolitical superpower struggle.” However, Poponak concluded, they don’t factor in “…a renewed focus on U.S. government cumulative debt.”
Defense stocks were already a bit jumbled, and Poponak’s projections likely won’t help. Northrop, for example, is a Moderate Buy. Further, its $543.69 average price target gives its shares 17.65% upside potential. Meanwhile, Lockheed is only considered a Hold by analysts. Its average price target of $480.63 gives its shares an upside potential of just 7.26%.
