In this article, we discuss the 5 stocks that Jim Cramer was right about. If you want to read about some more stocks that Jim Cramer was right about, go directly to Jim Cramer Was Right About These 10 Stocks.
5. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 39
Percentage Increase in Share Price Over Past Month: 7.33%
Northrop Grumman Corporation (NYSE:NOC) is an aerospace and defense firm. Cramer gave the company a Buy recommendation during the Featured Stock segment of his show on May 19, urging investors to take note of the boom in the defense sector in the wake of the Russian invasion of Ukraine that was a “game-changer” for the sector.
On May 12, Argus analyst John Eade kept a Buy rating on Northrop Grumman Corporation (NYSE:NOC) stock and raised the price target to $495 from $420, noting that the valuations of the stock were attractive with the P/E ratio remaining below the midpoint of the historical range.
At the end of the first quarter of 2022, 39 hedge funds in the database of Insider Monkey held stakes worth $940 million in Northrop Grumman Corporation (NYSE:NOC), up from 33 in the preceding quarter worth $561 million.
In its Q1 2022 investor letter, LRT Capital Management, an asset management firm, highlighted a few stocks and Northrop Grumman Corporation (NYSE:NOC) was one of them. Here is what the fund said:
“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue of more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation has resulted in the US defense market being controlled by five large companies: The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).
Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This has allowed Northrop Grumman Corporation (NYSE:NOC) to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximate 15x next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-18, the F-35 and the F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; Raytheon dominates missile systems; and so on.
Northrop’s revenue growth over the past decade has been mediocre but even that has led to impressive shareholder returns that have far outpaced the S&P500. What’s more, we believe that revenue growth may accelerate in the next few years. A lot of ink is spilled every year about the “massive” U.S. defense budget that critics claim is “out of control”. Given this, you might be surprised to hear that U.S. defense spending as a share of GDP is at the lowest level in recorded history, at a mere 3.8%. In other words, U.S. military spending could double and not be out of line with historical norms. While we are not calling for a new Cold War, given the global instability we are witnessing, it is not unreasonable to expect U.S. defense spending to grow faster than GDP over the next decade.”
