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HomelandDefenseStocks.com Q&A Interview with Scott Sacknoff, SPADE Defense Index Discussing Impact of Covid-19 on Sector

 

Point Roberts, WA and Delta, BC - July 21, 2020 (Investorideas.com Newswire, Homelanddefensestocks.com) Investorideas.com, a global news source and leading investor resource releases an exclusive Q&A interview through its defense portal HomelandDefenseStocks.com.

Q&A Interview: HomelandDefenseStocks.com (HDS) Scott Sacknoff

With us today is Scott Sacknoff, manager of the SPADE Defense Index (DXS), an investment benchmark for companies involved with the defense, homeland security, aerospace, and government space markets.

In this interview we are going to cover the impact of COVID on the sector, how stocks have performed in the first half of 2020 along with prospects for the second half of the year, 4 firms systematically important to the defense sector that people may not be aware of and the forthcoming US presidential elections.

HDS: Let's start with the state of the defense business and the impact of COVID on the sector.

Scott Sacknoff: Generally fine. The Department of Defense and the major prime contractors have been front-loading contracts and accelerating approval of international sales. COVID has impacted the billions of dollars of contracts have been left and the Pentagon and prime contractors have accelerated hundreds of millions in payments to supply chain partners in an effort to protect the US defense industrial base during the coronavirus slowdown. Though some suppliers and firms may have financial issues, the defense industrial base appears solid.

HDS: Yet aerospace and defense stocks haven't done so well and underperformed in the market in the first half of 2020. Even as the market rebounded from the sharp decline of greater than 30% earlier this year only to near its prior peak, the sector has lagged. Talk to us about this and what you expect for the second half of 2020 and going in to 2021.

Scott Sacknoff: Our defense sector benchmark has outperformed the market significantly for years, by more than 120% in each of the past two decades, so a decline is natural. When markets correct, people tend to sell where they have the biggest gains. Many firms involved with commercial aerospace saw a sharp selloff due to the double whammy of air travel being essentially shut down due to the COVID and the Boeing 737Max production being put mostly on hold as the firm works through getting it recertified for flight.

There are three key points to remember. One, commercial air traffic and cargo transportation will rebound at some point. There is no question about this. Two, Boeing is one of two major manufacturers of large aircraft along with the European Airbus. While the firm is working through some issues, the possibility that they can not overcome their current troubles is highly unlikely. Three, the investment performance of the defense sector always rebounds. Looking at more than thirty years' worth of data, and an investment tracking the SPADE Defense Index never lost money if you reinvested the dividends and held for at least 30 months.

Looking forward to the second half and 2021, I'd expect that Boeing receives flight readiness approval from the FAA for the 737-Max. Combined with the likelihood of a vaccine for COVID or medications that reduce its impact, we should see air travel steadily gain; maybe not to prior levels in the near term, but high enough to justify airlines to continue investments into modernizing their air fleet into more fuel-efficient vehicles. Lastly, defense spending should continue to exhibit the strength it has seen in recent years. The Pentagon has already issued research, development, and production contracts totaling hundreds of billions in system upgrades that will fund a number of programs for the next several years. Likewise, while the news cycle has been focused on COVID, there remain a number of hot spots around the globe which have not gone away. All of these factors, along with the historical track record of the Index, indicate that a reversion toward the mean is probable. One key to tracking investor sentiment is looking at the number of shares outstanding in a fund such as Invesco's Defense ETF (ticker: PPA). After declining when people raised cash during the market crash, shares invested in the fund have stabilized. This indicates to me that most of the selling is done and when the sector starts to receive some positive news, we should see inflows and that would drive a rebound in the stocks of defense firms.

HDS: The wildcard, of course, is the US presidential election in November, since the government budget for defense, homeland security, intelligence, and space remains a large part of the sector's revenue.

Scott Sacknoff: Interestingly, political party has less to do with defense sector returns that one might think. The key is whether our perception is that the world is a safer or more dangerous place. There was a Democrat in the White House for World War II, the Korean War, Vietnam, and recent actions in Iraq and Afghanistan. There was a decline in defense spending when Congress saw a "peace dividend" after the fall of the Soviet Union and we perceived the threats as being less. Looking at the world, I don't see a more stable planet. Additionally, we've researched stock market performance for the past hundred years and especially since the Great Depression and the preponderance of recessions and market declines happened when a Republican controlled the White House. It just goes to show you that everything isn't as black and white as we think.

HDS: The SPADE Defense Index just added four firms to its benchmark, some of which investors may be unfamiliar with. Who are they and why were they added?

Scott Sacknoff: We continually review the universe of public companies to identify new public listings, spin-offs, mergers, or firms expanding their activities within the sector. At the same time, we monitor the sector, using a variety of industry resources and announcements, to understand any changes to philosophy or defense strategy by the Pentagon. Our June review identified four firms that either recently went public or who now qualify based on our rules regarding size, liquidity, and whether defense is systematically important to the firm and the firm to the Department of Defense. These four were:

  • RADA Electronics, an Israeli defense electronics firm specializing in radar sensors that is listed on the NASDAQ (RADA).
  • PAE Systems (NYSE: PAE), a contractor with 15,000 plus employees that provides consulting, logistics, and professional services. They've been around since 1955 but recently went public after being acquired by private equity in a special purpose acquisition company (SPAC).
  • Howmet (NYSE: HWM) is a firm that emerged after two rounds of spinoffs from Alcoa. The resulting firm has more than 65% of its revenues coming from specialty metals that are used on things like jet and rocket engines, titanium structures, and castings.
  • Lastly, post-COVID, DoD designated Spirit AeroSystems (SPR) as systematically important and critical to the US domestic production capacity. Most of their business is in commercial aerospace systems but the firm generates more than half a billion in defense-related sales which it hopes to double in the next few years.

HDS: Thank you for taking the time to chat with us. For more information on the SPADE Defense Index, please visit spadeindex.com/defense. To learn more about the Invesco Aerospace and Defense ETF that tracks this benchmark, please visit Invesco's website, the ticker is PPA.

This interview does not constitute an offer of an investment product. SPADE Indexes makes no representation regarding the advisability of investing in vehicles based on any of its indexes including the SPADE Defense Index. All information is provided 'as is', for information purposes only, and is not intended for trading purposes or advice. Neither SPADE Indexes nor any related party is liable for any informational errors, incompleteness, or for any actions taken based on the information contained herein.

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