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Jim Cramer, like John McCain, is strong on defense. Just for different reasons than the presumptive Republican presidential nominee.
While the Arizona senator’s pro-Iraq War stance could push the defense budget even higher, Cramer’s concerned only with the stocks that would benefit as a result.
Lockheed Martin [LMT
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], Northrop Grumman [NOC
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], Raytheon [RTN
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], General Dynamics [AGN
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], L-3 [GD
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] – they could all reap a windfall from increased defense spending. And with the Democrats bickering, possibly hurting their chances in November, the potential for a pro-military McCain in the White House is ever more likely, Cramer said.
But that’s not the only reason he likes this sector. Defense stocks are up 7.5% since Cramer’s midsummer call, but they’re actually cheaper now than they were then. The average defense stock price-to-earnings ratio in July was 14.5. Now, it’s 13.6 – versus 19 times earnings for the average S&P 500 stock. That ain’t right, Cramer said. Defense companies have better growth and balance sheets, and the outlook for the industry is bullish.
McCain, an Annapolis grad and former Navy pilot, will steer defense spending toward his alma mater, Cramer said, and that’s good news for General Dynamics. GD’s third behind Lockheed and Northrop as a naval contractor, but the Mad Money host said General Dynamics is overlooked and has a better chance to take share under McCain.
And, of course, GD’s fundamentals are solid: $2.9 billion in cash, which is $100 million more than the company’s debt, a nice buyback, a recent earnings beat. The stock, trading at 13.1 times forward earnings, is cheaper than its peers, too.
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In McCain's Navy, General Dynamics could be the admiral's favorite. But Cramer said Raytheon and Northrop are worth considering as well. Check out this video for an in-depth look at why defense should be owned and this video for more on GD.
Jim's charitable trust owns Raytheon.
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