On Aug 13, President Trump approved a landmark defense spending bill which has received widespread bipartisan support. The extent of this backing can be attributed to his attempt to check China’s aggression. Lawmakers have also approved of Trump’s efforts to support American men and women in uniform.

The 2019 National Defense Authorization Act, or NDAA, authorizes a military budget of $717 billion for the upcoming fiscal year. It is indicative of the Trump administration’s resolve to modernize and strengthen the armed forces through a step up in defense spending. Investing in defense and related stocks looks like a smart option at this point.

Largest Pay Raise for Troops in a Decade

The NDAA provides $616.9 billion as the base budget for the Pentagon. The bill also includes $69 billion toward overseas contingency operations funding. Meanwhile, $21.9 billion has been approved for the nuclear weapons program, which is overseen by the Department of Energy.

The bill also seeks to authorize a 2.6% increase in pay for troops. This is the largest such wage hike in almost a decade. Some of the major items that the Pentagon is now authorized to purchase include 77 of Lockheed Martin Corporation’s LMT F-35 Joint Strike Fighters.

This purchase itself is worth $7.6 billion. However, the bill also seeks to block the delivery of the same jets to Turkey. This is because this fellow member of NATO is slated to purchase a missile defense system from Russia.  

Trump Lauds Bill as Historic Move

President Trump praised the bill saying it will give men and women in uniform the “finest planes, and ships and tanks and missiles.” He claimed that the NDAA was the “most significant investment” in the armed forces in “modern history.” Trump reiterated that his administration was committed to “strengthen our military like never ever before.”

The Senate passed the legislation by an 87-10 vote on Aug 1. The House of Representatives had already approved the bill in late July.  Of course, Congress must still approve a spending bill, which provides funding for the Department of Defense’s specific priorities. 

Bill Targets China, Commerce Ministry Protests

Several lawmakers think the NDAA is the toughest stance on China than any legislation in history. The legislation seeks to thwart a range of Chinese government policies. These include heightened military activity in the South-China Sea, the quest for the latest U.S. technology and dissemination of Communist Party propaganda at U.S. institutions.

To this end, the NDAA seeks to strengthen the Committee on Foreign Investment in the United States (CFIUS). Since the committee is tasked with determining whether investment proposals are a threat to national security, this step is viewed as one which targets China.

China’s Ministry of Commerce has taken notice of these efforts. It said that it will “comprehensively assess the contents” of the bill and examine its impact on Chinese firms. China has urged the United States to “avoid CFIUS becoming an obstacle to investment cooperation between Chinese and U.S. firms.”

Our Choices

The NDAA is an indication of the Trump administration’s intent to modernize and strengthen U.S. armed forces. While a pay raise for troops is a notable inclusion in the bill, the step up in overall spending on arms will benefit the defense industry substantially.

Investing in stocks from the sector looks like a prudent option at this time. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

Aerojet Rocketdyne Holdings, Inc. AJRD is a technology-based engineering and manufacturing company. The company develops and produces specialized propulsion systems as well as armament systems.

Aerojet Rocketdyne has a VGM Score of B. The company has expected earnings growth of 71.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 30.9% over the last 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Huntington Ingalls Industries, Inc. HII designs, builds and maintains nuclear-powered ships such as aircraft carriers and submarines, and non-nuclear ships, such as surface combatants, expeditionary warfare/amphibious assault and coastal defense surface ships.

Huntington Ingalls has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 39.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.8% over the last 30 days.

Engility Holdings, Inc. EGL is engaged in providing government services in engineering, professional support and mission support to customers in the U.S. Department of Defense, Federal civilian agencies and allied foreign governments.

Engility Holdings carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 5.8% over the last 30 days.

Lockheed Martin is the largest defense contractor in the world.

Lockheed Martin carries a Zacks Rank #2 and has a VGM Score of B. The company’s has expected earnings growth of 29.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 7% over the last 30 days.

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