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What are we looking for?

U.S. aerospace and defence stocks with reasonable valuations and strong price momentum.

The U.S. aerospace and defence industry has had a great run – currently up 22.5 per cent in the past year. With geopolitical tensions running high in North Korea, Syria and Iraq, many market watchers are wondering whether these stocks may continue their outperformance.

The screen

We will be using Recognia Strategy Builder to search for stocks in this industry with reasonable valuations, consistent earnings growth and strong short-term price momentum.

We begin by setting a minimum market capitalization threshold of $5-billion (U.S.) to focus on larger, more established companies in this industry. To ensure we don't overpay for our investments, we will select stocks with forward price-to-earnings ratios of 25 or less.

We also wish to select companies with growing earnings. To do this, we will screen based on five-year historical earnings-per-share growth rates of 5 per cent annually or more.

Finally, in order to focus on stocks that have demonstrated strong price performance in the short term, we will select only companies with year-to-date positive price performance of 5 per cent or more.

More about Recognia

Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.

What did we find?

Topping our list is shipbuilder Huntington Ingalls Industries Inc. – a large contractor to the U.S. Navy. The company has the highest five-year EPS growth rate on our list at 44.4 per cent. In mid-February, the company announced fourth-quarter earnings that beat expectations by a huge margin. This has led to a large runup in the stock – now up 10.6 per cent year-to-date.

Boeing Co. is the largest company on our list with a market cap of $108.6-billion. Boeing is the world's largest aerospace company and is a leading supplier of commercial jets, defence and space systems. Boeing stock has been good to investors – this stock is up 35 per cent in the past 12 months and has the highest year-to-date performance on our list at 13.1 per cent.

The lowest forward P/E ratio, at 17.4, belongs to Orbital ATK Inc., which was formed in 2015 as the merger of Orbital Science Corp. and Alliant Techsystems Inc. The company is best known for providing commercial satellites as well as launch systems including the Cygnus cargo carrier, which supplies the International Space Station.

Historical performance

Recognia Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 15.2-per-cent annualized return compared with 10 per cent for the Dow Jones industrial average and 11.4 per cent for the S&P 500.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.

Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.

U.S. aerospace and defence stocks with a strong performance

RankCompanySymbolMarket Cap. ($Bil U.S.)Forward P/E RatioEPS Growth Rate (5-Yr Historical)Price Performance (YTD)Dividend Yield
1Huntington Ingalls Ind.HII-N$9.519.644.4%10.6%1.1%
2Lockheed Martin Corp.LMT-N$78.322.011.6%7.4%2.6%
3Boeing Co.BA-N$108.624.87.9%13.1%2.7%
4B/E Aerospace Inc.BEAV-Q$6.619.734.1%7.1%1.3%
5Raytheon Co.RTN-N$44.720.37.4%6.6%2.0%
6Orbital ATK Inc.OA-N$5.617.45.1%10.0%1.3%
7Rockwell Collins Inc.COL-N$13.017.96.5%5.6%1.4%