Facebook
Twitter
The terrorist attacks in Paris and recent downing of a Russian fighter jet by Turkish armed forces have sent fear across much of the market.
There are now armed security forces patrolling airports across the U.S. It’s a time of heightened security as we head into the holiday season.
Investors are even adjusting their portfolios accordingly by adding some security (literally). The obvious trade has been buying defense contractors, which will benefit from increased global turmoil. They also offer appealing dividends.
However, the conventional defense stocks, such as Raytheon (NYSE: RTN) and Lockheed Martin (NYSE: LMT), are already trading at 52-week highs.
Then there are the gun makers. The likes of Sturm, Ruger & Co. (NYSE: RGR) and Smith & Wesson (NASDAQ: SWHC) are up close to 5% over the last week.
While investors have been tepid on retail stocks of late, they have been buying defense names in full force.
But there could be one part of the market that investors have been overlooking: government services. So while the likes of Raytheon and other contractors will benefit from an increase in demand in tanks and fighter jets, there are a handful of companies doing behind the scenes work.
Here are the top two fear stocks to own now:
No. 1 Fear Stock to Own: Booz Allen Hamilton (NYSE: BAH)
Booz Allen is a consulting firm that offers technology and engineering services to the U.S. Department of Defense – particularly the National Security Agency – and the Department of Homeland Security. A quarter of its revenues are generated from such intelligence work. As the U.S. government boosts its global surveillance and creates partnerships for information sharing with other countries, the likes of Booze Allen will be a big winner.
Booz Allen already has a strong backlog, which is approaching multi-year highs and means more robust growth going forward. Earnings are expected to grow at an annualized 8.5% rate over the next five years – well above many peers. It’s also in the process of working out a two-year defense budget that will further juice its backlog.
Shares are offering a 1.7% dividend yield and the company is generating a healthy 17% return on invested capital.
No. 2 Fear Stock to Own: ManTech International Corp. (NASDAQ: MANT)
ManTech is another consulting firm focused on providing information technology services to the U.S. government. It will benefit from U.S. efforts to boost its intelligence presence in the Middle East.
Shares are still 35% off their multi-year highs back in 2009, given the decline in budgets for overseas operations, including the pullback from Afghanistan by the U.S. government. However, this could be precisely what makes ManTech worth buying today.
The worries over U.S. budget sequestration have pressured ManTech and others, but they are finding stabilization in their revenue streams of late and could get a boost from future U.S. involvement in the Middle East.
Beyond that, ManTech also has a presence in the cybersecurity and health care consulting markets. Shares offer a 2.7% dividend yield. It’s also worth noting that ManTech has a debt-free balance sheet.
In the wake of the tragic Paris terrorist attacks the U.S. is under increased pressure to step up its efforts to assist France and other allies in the fight against terrorism. While the major defense contractors will benefit, the stocks that could benefit most are on the intelligence and espionage side.