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A Power Pick for Aerospace &Defense

PowerShares Aerospace & Defense has gained roughly 17 percent so far this year.

PowerShares Aerospace & Defense has gained roughly 17 percent so far this year, significantly outstripping the S&P 500’s 10 percent rise, notes Scott Chan, editor of The Complete Investor.

From a strict investment perspective, there’s no doubt the Trump administration has been good for defense stocks, with Trump calling for more military spending at home and pushing U.S. allies to boost their outlays as well.

The $110 billion arms deal with Saudi Arabia, the first portion of a larger agreement worth a projected $350 billion over 10 years, should further gin up more business for U.S. defense contractors.

The ETF’s major holdings have reported strong quarterly earnings, with many defense stocks trading at or near all-time highs. Boeing (BA), its largest position, had an especially impressive quarter.

During 2017’s second quarter, the company received $27 billion in net orders, resulting in a total backlog of more than $480 billion, indicating healthy demand. It was simply a fantastic quarter for Boeing, and it propelled the stock price sharply upward, which in turn helped PPA.

While they didn’t match Boeing’s blowout quarter, other top defense holdings in the ETF, including Lockheed Martin (LMT), Raytheon (RTN) and Northrop Grumman (NOC), all similarly beat expectations and raised guidance

It all points to a competitive environment for defense stocks but one with robust demand. The largest risk appears to be potential Washington turmoil given the volatile nature of the Trump administration.

Since the U.S. government is a major customer for defense companies, political chaos or impasse could delay or reduce business.

Still, with defense-minded Republicans in control, that’s not a major concern at this time. We are raising our suggested buy-up-to price for PowerShares Aerospace & Defense to $52.

Scott Chan is editor of The Complete Investor.

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