JP Morgan Gets Bullish on Defense Names — Time to Buy This ETF?

Analysts at JP Morgan recently upped their view on several defense sector names, which could in turn benefit defense-focused ETFs as well.

From 24/7 Wall St.:

The firm raised price targets on five defense firms Thursday morning, saying that what matters going forward is free cash flow. It’s not too much of a stretch for investors to read that to mean more returns in the form of dividends and share buybacks.

General Dynamics Corp. (NYSE:GD) was maintained at Outperform and the price target was raised from $157 to $172. As recently as late March, JPMorgan’s price target on the stock was $114. Based on Wednesday’s closing price of $152.29, the implied upside is 12.9%. The stock’s 52-week trading range is $121.61 to $153.80, and the consensus 12-month price target is $166.92 (likely not including the JPMorgan hike).

L-3 Communications Holdings Inc. (NYSE:LLL) was raised from Neutral to Outperform and Morgan’s price target was lifted from $158 to $182. The analysts have named L-3 as their top pick in the defense sector. At the most recent closing price of $146.78, the potential upside in the stock is 24% and the 52-week range is $101.13 to $154.50. The consensus 12-month target is $163.22.

Northrop Grumman Corp. (NYSE:NOC) was dropped from Overweight to Neutral Thursday morning, but the price target was lifted from $225 to $231. Shares closed previously at $213.10, yielding an implied gain of about 8.4%. The 12-month price target is $232.92 and the 52-week range is $158.84 to $224.12.

Raytheon Co. (NYSE:RTN) was maintained at Buy and the price target was raised from $145 to $165. At Wednesday’s closing price of $141.07, the potential upside is 17%. The 52-week range is $99.60 to $143.39.

Harris Corp. (NYSE:HRS) sports a Buy rating from the JPMorgan analysts, and the price target was lifted from $93 to $104. At Wednesday’s closing price of $91.02, the implied gain is 14.3%. The consensus 12-month target is $97.71 and the 52-week range is $70.10 to $91.99.

Investors looking for exposure to the aerospace/defense sector without the risk of owning individual names should consider the the iShares Dow Jones US Aerospace & Defense ETF (NYSE:ITA). One of only three ETFs targeting defense names, ITA is by far the largest of the group, with $876 million in assets under management.

ITA’s expense ratio of 0.43% puts it right in the middle of its group, while its top ten holdings include UTX, BA, LM, GD, RTN, NOC, TDG, LLL, ROC, and TXT.

ITA-2016-08-26

ITA shares rose slightly in Friday morning trading to $131.95, and have gained 11.54% year-to-date.

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