A Look at Hedge Funds’ Favorite Defense Stocks Amid U.S. Decision to Lift Arms Ban on Vietnam

President Barack Obama announced Monday that the United States is lifting a long-lasting ban on the sale of military equipment to Vietnam. The U.S. president arrived in Hanoi on Sunday for a three-day visit as part of his “pivot” towards Asia, one of the Obama Administration’s central foreign policy initiatives. The historic announcement was made at a joint press conference with Vietnam’s President Tran Dai Quang, with the deal said to represent a sign of normalizing and warming relations between the United States and the nation’s one-time enemy. Barack Obama dismissed insinuations that the deal was aimed at opposing China’s fast-growing military strength in the region, saying that “The decision to lift the ban was not based on concerns regarding China or any other considerations. It was based on our desire to complete what has been a lengthy process of moving towards normalization with Vietnam”. The decision to lift the decades-long ban on the sale of military equipment to Vietnam may serve as a positive catalyst for U.S. arms sales, so Insider Monkey decided to lay out a list of most favored defense stocks within the hedge fund industry.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5. Aerojet Rocketdyne Holdings Inc. (NYSE:AJRD)

– Investors with long position as of March 31: 19

– Aggregate value of investors’ holdings as of March 31: $282.55 Million

The hedge fund sentiment towards Aerojet Rocketdyne Holdings Inc. (NYSE:AJRD) declined significantly during the first quarter of 2016, as the number of funds from our system with stakes in the company dropped to 19 from 25 quarter-over-quarter. The aggregate value of hedge funds’ holdings in the manufacturer of aerospace and defense products shrunk to $282.55 million from $285.14 million and those 19 funds amassed nearly 27% of Aerojet Rocketdyne’s outstanding shares at the end of March. The maker of rocket propulsion systems posted a net income of $5.1 million for the first quarter, after incurring a net loss of $3.3 million in the same quarter of 2015. Aerojet Rocketdyne’s net sales for the quarter reached $356.9 million, up from $323.0 million recorded a year ago. Earlier this month, analysts at Oppenheimer said they anticipate the company to continue growing margins and generate increased free cash flow, partially owing to ongoing integration and cost-saving initiatives. Shares of Aerojet Rocketdyne are up 8%, thus far in 2016. Jim Simons’ Renaissance Technologies owns 1.28 million shares of Aerojet Rocketdyne Holdings Inc. (NYSE:AJRD) as of March 31.

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#4. Orbital ATK Inc. (NYSE:OA)

– Investors with long position as of March 31: 31

– Aggregate value of investors’ holdings as of March 31: $781.58 Million

The number of hedge fund vehicles monitored by our team with stakes in Orbital ATK Inc. (NYSE:OA) increased to 31 from 26 during the March quarter, whereas the dollar value of those stakes decreased to $781.58 million from $810.88 million. The 31 hedge funds accumulated roughly 15% of Orbital’s total number of outstanding shares. The shares of the aerospace and defense systems company are down 2% since the beginning of 2016. Earlier this month, Orbital ATK announced that it had received a $16 million order for its DSU-33D/B proximity sensors. The delivery of the fuzes, which represent radio-frequency ranging sensors that have the capability to sense the height of a weapon above the target zone, is anticipated to commence in mid-2016. The company currently pays out a quarterly dividend of $0.30 per share, which equates to a dividend yield of 1.38%. Cliff Asness’ AQR Capital Management has 752,117 shares of Orbital ATK Inc. (NYSE:OA) in its portfolio as of the end of March.

#3. Lockheed Martin Corporation (NYSE:LMT)

– Investors with long position as of March 31: 37

– Aggregate value of investors’ holdings as of March 31: $867.13 Million

The smart money sentiment towards Lockheed Martin Corporation (NYSE:LMT) remained unchanged during the January-to-March period. Nonetheless, the overall value of the stakes held by the 37 hedge funds invested in Lockheed Martin increased quarter-over-quarter to $867.13 million from $826.81 million. Just recently, analysts at RBC Capital Markets downgraded the global security and aerospace company to ‘Sector Perform’ from ‘Outperform’, citing strong stock performance and a resulting valuation multiple expansion. RBC analysts, who have a price target of $244 on Lockheed Martin, believe that the company may not be able to grow dividend payments at a mid-teens rate while implementing an aggressive share buyback program, as RBC anticipates the dividend to account for roughly 60% of expected earnings per share for 2016. In November 2015, Lockheed Martin completed the $9.0 billion acquisition of Sikorsky Aircraft Corporation, a global company that designs and manufactures military and commercial helicopters; the deal added significantly to the company’s top-line figure in the previous quarter. Shares of Lockheed Martin are 10% in the green year-to-date. First Eagle Investment Management, run by Mehdi Mahmud, reported ownership of 1.34 million shares of Lockheed Martin Corporation (NYSE:LMT) in the latest round of 13Fs.

#2. Raytheon Company (NYSE:RTN)

– Investors with long position as of March 31: 42

– Aggregate value of investors’ holdings as of March 31: $1.45 Billion

There were 42 hedge funds stalked by Insider Monkey with equity investments in Raytheon Company (NYSE:RTN) at the end of the March quarter, up from 35 recorded at the end of the December quarter. The value of those equity investments rose to a massive $1.45 billion from $1.08 billion during the three-month period and represented 4% of Raytheon’s outstanding shares. Raytheon Company develops technologically advanced and integrated products, services and solutions in markets such as sensing, command, communications, cyber and intelligence, mission support, among others. Earlier this month, Jordan’s Ministry of Defense inked an agreement with the U.S. Department of Defense to acquire tube-launched, wireless-guided missiles produced by Raytheon, with deliveries commencing this year. The company’s total net sales for the first quarter of 2016 that ended April 3 increased $475 million to $5.76 billion due to higher external net sales at the Missile Systems business segment and higher sales from the new cybersecurity joint venture company called Forcepoint. Raytheon has seen its market value gain 3% since the start of 2016. Israel Englander’s Millennium Management held 1.41 million shares of Raytheon Company (NYSE:RTN) at the end of March.

#1. Northrop Grumman Corporation (NYSE:NOC)

– Investors with long position as of March 31: 42

– Aggregate value of investors’ holdings as of March 31: $2.35 Billion

Northrop Grumman Corporation (NYSE:NOC) received some love from the hedge fund industry during the first quarter of the year, as the number of funds invested in the $38 billion-company increased to 42 from 40 quarter-on-quarter. Similarly, the aggregate value of hedge funds’ equity investments in the company rose to $2.35 billion from $2.26 billion. As in the case of Lockheed Martin, global security company Northrop Grumman was downgraded to ‘Sector Perform’ from ‘Outperform’ by analysts at RBC Capital Markets due to the strong performance of the stock and higher valuation multiple. In the second half of 2015, the U.S. Air Force announced that Northrop Grumman would build the B-21 Long-Range Strike Bomber, an $800 million high-tech stealth bomber. The Long-Range Strike Bomber program, which is said to be classified, has entered into the Engineering and Manufacturing Development phase. Meanwhile, RBC believes the B-21 program will be margin dilutive for the company in the short-term future. Shares of Northrop Grumman have gained 12% year-to-date. Lee Ainslie’s Maverick Capital acquired a new stake of nearly 659,000 shares of Northrop Grumman Corporation (NYSE:NOC) during the first quarter.

Disclosure: None