HomelandDefenseStocks.com Q&A Interview with Scott Sacknoff, SPADE Defense Index and Aerospace & Defense ETF, Discussing Defense Sector
Point Roberts, WA and Delta, BC - January 3, 2020 (Investorideas.com Newswire) 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 (SMS)
HDS: With us today is Scott Sacknoff, manager of the SPADE Defense Index ( DXS), the underlying benchmark for the Invesco Aerospace & Defense ETF ( PPA). Let's start with a recap of 2019. The stock market had one of its best years on record. Please tell us how the aerospace and defense sector performed.
SMS: Better than most people realized. The returns in the sector went largely unnoticed during 2019 as much of the attention seemed to focus on Boeing and its troubles with the 737 Max. By the time the year ended, the value of the SPADE Defense Index was up 38.49%, meaning it outpaced the 28.88% return of the broader stock market by nearly double digits.
HDS: Outperforming the market seems to be a common thread in your past interviews.
SMS: It is. We just ran the decadal numbers and from 2010 through 2019 the Index outperformed the S&P500 by 120.53% [310.26% vs. 189.73%]. From 2000 through 2009, the defense sector had a price gain of 97.1% vs a decline in the S&P500 of 24.1%. This means it outperformed it again by over 120% [121.18%]. This means that regardless of which party held the White House or Congress, through the presidencies of [George W.] Bush, Obama, Trump and switches in the House and the Senate, aerospace and defense continued to be the sector to invest in for two decades and counting. Over a 10-year period, the Index increased in value by 310.26% and over 20 years 708.51%.
HDS: Why is that? Sectors normally go through rotation periods when they are out of favor with investors.
SMS: They do; but spending on aerospace and defense operates differently than most economic sectors, and that is still a concept lost by many investors. There are essentially two main drivers to how the sector will perform. The first is the perception of world stability. The more dangerous and unstable the world seems to be, the more likely it is for nations around the world to spend money on defense and security to protect its citizens and their "way of life". Whether it is a local terrorist attack or conflicts around the world in disparate locations, the ability of news outlets to update viewers on what is happening tends to make people nervous. This leads to support for funding the budgets of Defense and Homeland Security. Political party doesn't really matter. When the perception is "we need to protect ourselves" budgets are strong. When the perception is "the world is a safer place" budget support declines. And the last time the US felt that the world was truly a safer place was at the end of the Bush Sr. administration when the Soviet Union fell.
The second is commercial aerospace. This is dependent on global economic activity but influenced by other factors including the level of global trade; the cost for upgrading aircraft versus the reduction of operating costs by airlines using more advanced, fuel-efficient planes; and expanding interest in "experiences" versus owning items by citizens in wealthier nations which can increase the load factors for airline operators.
HDS: Staying on this topic for a second, can you address the impact of what happened in Iran and Iraq this week?
SMS: Earlier this week, an Iranian general was assassinated by the U.S., an action which took place roughly 10,000 miles away from its own borders, but it immediately influenced the perception of stability here in the U.S. Although this general is widely seen as a person responsible for a lot of death and misery over the past 20 years, the question now arises of what is next? How does Iran plan to respond? Iran has historically been more involved in influencing actions behind the scenes instead of in direct conflict. This could mean anything from supporting an attack on Saudi Arabian oil fields, funding cyberterrorists to influence the upcoming elections in the U.S., arresting British citizens, causing turmoil in the Straits of Hormuz to impact oil transport, causing an incident in Israel; or directly attacking U.S. citizens...we really don't know. These are the conditions that create concern that lead toward support for spending on security.
HDS: Getting back to the returns in the sector. Who were the biggest winners and losers?
SMS: Looking at 2019, there were 25 firms in the SPADE Defense Index that gained more than 40%. These were led by Vectrus (up 137.5%), Triumph Group (119.74%), and KBR (100.92%), each of which more than doubled during the year. The prime contractors were noticeably further down the list led by Lockheed Martin at #15, whose price increased by 48.7%. CACI, a leading defense digital technology firm was up nearly 74%. In contrast to prior years, it was a number of mid-cap firms that drove the returns. Only three firms in the index were down for the year led by Intelsat which lost 2/3 of its value after the FCC announced its intent-which is being challenged by a number of firms-to take back digital spectrum and auction it, without adequate compensation to the firms controlling that spectrum. Essentially it is a land grab, but it highlights the risk associated with firms operating in a market area that is dependent on a large client such as the government and/or regulations. As far as the 2010-2019 period, AXON, formerly TASER, was the clear winner gaining 1573%. Northrop Grumman, Boeing, and Lockheed all gained more than 600% over the decade.
HDS: Let's turn our attention to 2020. How do you see the year shaping up going forward?
SMS: Considering it is a presidential election year and the two major parties in the US have significant differences and animosity toward each other, at least publicly, and it is likely that political rhetoric will dominant the conversation. As such, I anticipate some volatility in the sector based on the news, however the actual impact to the companies themselves will be minimal during 2019 considering the firms are operating under budgets and plans that are already established.
I also believe, as the past two decades have highlighted, that the world stability remains precarious as there are hot spots around the globe which will continue to raise concern and, so to speak, put a floor under any declines in defense spending that might be considered in coming years. Internationally, defense spending has risen over the past several years and the U.S. has been a willing supplier to its allies and other nations. This provides additional support to defense contractors and manufacturers as the revenues from contracts go predominately to the companies, not to the US government where a significant portion of the defense budget is allocated to personnel and internal operations.
I envision that North Korea and Iran will remain hot spots; there will be continued tension with China over trade and military actions in the Pacific region; there will be flare-ups in the Middle East; Russia will continue to try and exert its influence on the world scene; and the troubles in Central and South America, such as we've heard about in Guatemala, Honduras, and Venezuela will remain. Elsewhere, it will be interesting to see how Brexit plays out in 2020 as well as the great divide between right and left political parties, in a number of nations, evolves. All of these add to the wall of worry that likely means stability for the defense sector.
As far as the commercial side of the sector, much of it revolves around Boeing--the reaction to how and when the 737Max is brought back into service, and whether Congressional inquiries put pressure on the firm, continuing damage the firm has already brought onto itself, or if the firm can go back to producing half the world's aircraft.
HDS: Looking at the future of defense technology, what themes do you see increasing in importance?
SMS: The ones that immediately come to mind are hypersonic weapons and the defense from hypersonic weapons, cyberprotection of digital data and electronics, and which of the hundreds of new space players will emerge as the next great public companies.
HDS: Any final thoughts?
SMS: Aerospace and Defense has proven, over at least the past two decades, to be a place for investors to achieve substantial gains as well as providing portfolios with insurance against an unstable world.
HDS: Thank you for your time. Scott Sacknoff manages the SPADE Defense Index which serves as the underlying index for Invesco Aerospace & Defense ETF (NYSE ticker: PPA). Additional details on the Index, the firms included in it, and their free SPADE Investor newsletter can be found at spadeindex.com/defense.
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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