Trump's Comments Force Our Hand on This Portfolio Holding
Conflicting statements make us increasingly cautious on this name.
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It’s no secret the TheStreet Pro Portfolio’s position in Lockheed Martin LMT has been a drag on performance despite the company’s record backlog exiting 2024 and continued program wins this year. A good portion of the pressure on the shares, and other defense contractors as well, has been due to comments from DOGE head Elon Musk about the F-35 program. Tempering those comments, Lockheed has racked up close to $3 billion in wins in the last few weeks.
Bringing some additional support, during Defense Secretary Pete Hegseth’s confirmation hearings he shared that he wouldn’t want to spend less than 3% of GDP on defense compared to the 3.4% of GDP it has been running at. That suggests a potential cut between 12%-15% on defense spending, which would be mitigated by ramping defense spending outside the U.S. There is also President Trump’s calling on allies in the U.K. and Europe to buy American weapons and military equipment in order to maintain the NATO alliance as well as his push for NATO members to spend closer to 5% of GDP on defense compared to the 2.7% the bloc spent in 2024.
That is enough back and forth to explain the rise in investor uncertainty for defense stocks.
But more recent comments from President Trump that U.S. military spending could be cut in half have increased the uncertainty. While cuts of that magnitude may not be the ultimate outcome, for now, it puts a cloud over defense stocks, including LMT.
This new development is forcing our hand to downgrade LMT to a Three rating.
Why a Three?
As we’ve seen in recent weeks, Trump’s bluster has been followed up by softer developments such as Mexico and China tariffs being pushed off and yesterday’s reciprocal tariffs not starting until April 1. That suggests his comment about cutting defense spending in half could be only aspirational and dependent on agreements with other countries. At the same time, LMT shares have landed in oversold territory, which suggests even a smidge of good news could see them rebound.
What Would It Take for Us to Exit LMT?
It’s a fair question. If we were to see pushback from NATO countries on higher defense spending levels and clear signs Trump would move to make larger cuts than those intimated by Hegseth, that combination would point to lower overall defense spending dollars on the horizon.
Should we see LMT shares rally and move out of oversold territory, but the cloud of uncertainty remain, we may opt to lighten the portfolio’s exposure.
At the time of publication, TheStreet Pro Portfolio was long LMT.
