The #1 Reason to Love a Government Shutdown – Double-Digit Profits

Keith Fitz-Gerald Sep 18, 2015
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Sigh… we stand yet again on the verge of another government shutdown. This time the bickering centers on funding related to Planned Parenthood which has been linked to the appalling sales of fetal body parts in recent months, while other legislators insist on a planned multi-billion dollar tax hike for private equity managers.

What could possibly go wrong – other than everything?!

The way I see it, wingnuts on both sides of the aisle are playing chicken with an $18 trillion economy and world markets once again.

Still, the investor in me is excited by the prospect.

The last government shutdown, as costly and embarrassing as it was, created some quick double-digit profit opportunities for savvy investors.

This one will, too.

But only if you’re prepared ahead of time using one of our favorite Total Wealth Tactics – the Lowball Order – and only if you’re looking at the best companies in this sector.

Congress Caused a $24 Billion Fumble in 2013 and Savvy Investors Banked Double Digit Gains Anyway

The October 2013 government shutdown came with a $24 billion price tag according to Standard & Poors, as hundreds of thousands of furloughed workers took home smaller paychecks and small businesses were hobbled by frozen government contracts and payments. Consumer confidence went into the proverbial toilet and quarterly GDP growth fell from 3% to a middling 2.4%.

Not surprisingly, mainstream investors were spooked by headlines highlighting the unfolding doom associated with Washington’s incompetence. Nowhere was that more clearly defined than in defense stocks, with some of the bigger players losing up to 7% of their market capitalization in just three days.

As usual, though, the herd failed to grasp something we talk about all the time.

Companies tapped into Unstoppable Trends making “must have” products tend to have the strongest fundamentals, the best balance sheets and, more importantly, plenty of staying power. Any short-term price drop is, therefore, a fabulous buying opportunity under the circumstances.

Consider what happened to Lockheed Martin in late September and early October as the last shutdown became inevitable:

 

TW1 (2)


Click to Enlarge

Source: CNN.com

Raytheon and Lockheed Martin were in the same boat. Both fell approximately 6% on the news of the shutdown, shedding tens of billions of dollars in market capitalization as they tumbled. Northrop Grumman, United Technologies, and General Dynamics are just a few of the others that lost more than the broader markets back then.

But here’s the thing – each of those companies came roaring back and investors who swooped in to buy them at a steep discount as recommended have had the opportunity to more than triple the S&P 500 since our government reopened on October 17, 2013.

Now, obviously there are no guarantees. You cannot simply buy any stock that’s cheap or in a decline – most are simply junk at a lower price.

But companies like the ones we’re talking about are high quality players tapped into the biggest of all of our Unstoppable Trends – War, Terrorism and Ugliness. That means they’ve got trillions of dollars driving them and gobs of upside potential ahead. Short-term market movements are nothing more than noise for them.

The best way to play this situation is to use one of our favorite Total Wealth Tactics – the Lowball Order.

If you’ve never heard the term before, a “Lowball Order” is one of the simplest, yet most powerful orders available today, especially in volatile market conditions like we have right now.

They’re great for at least three powerful reasons:

  1. You can place them in advance.
  2. You don’t have to be at your computer to actively manage your money.
  3. You control your risk by waiting to make your move until the stock you want to buy meets YOUR risk reward criteria.

Here’s how a Lowball Order works.

First, you line up with one of the six Unstoppable Trends we’re following – Medicine; Technology; Demographics; Scarcity & Allocation; Energy; or, in this case, War Terrorism & Ugliness.

Second, you select a stock that’s been beaten down or is otherwise out of line with long-term expectations, fundamentals, and earnings potential. Ideally, this isn’t just any old stock. It’s one that you’d buy if it ever went “on sale.” Great examples include Netflix Inc. (NasdaqGS:NFLX) at $60, Apple Inc. (NasdaqGS:AAPL) at $75, Gilead Sciences Inc. (NasdaqGS:GILD) at $70, or even Alibaba Group Holding Ltd. (NYSE:BABA) at $45. Your list may differ, but my point is that you have a list… at all times.

Third, you pick a price – to the penny – that matches your individual risk tolerance, your investment objectives, and your belief about what the company is really worth. You can do that using fundamental measures like the “price to book” or intrinsic valuations, a la Graham and Dodd.

Or, you can also simply pick a technical point at which there is logical “support,” or even previous lows depending on your time frame. There’s no hard-and-fast rule here, but many traders find 10%-15% below recent 30-day lows to be fertile hunting in choppy markets. To really stack the odds in your favor, though, you want to pick a price so low that others tell you that it’s impossible for XYZ to trade at that level.

Fourth, you place your order to buy “XYZ at $___ per share or less, GTC” – meaning good till cancelled.

Then, you sit back and wait for a price dip. In this case, it’s more financial buffoonery from Congress and a corresponding knee-jerk reaction from uninformed investors who don’t understand what we’re talking about today.

Here are three companies to get you started.

You’ll note they’re all defense contractors for one simple reason – the Pentagon will never hold a bake sale to fund their programs, especially with the world’s geopolitical situation the way it is. That zinger is courtesy of my editor, John Persinos.

Government Shutdown Lowball #1: The Boeing Company (NYSE:BA)

Based in Chicago, Ill., Boeing is a $93.8 billion defense company that has clients and operations in 150 companies as of 2015. As the world’s largest aerospace company, it specializes in both military and commercial aircraft, satellites, electronic and defense systems, and advanced information and communication systems. Its most recent earnings report for Q2/2015 showed earnings from operations up 11% year-over-year – unsurprising considering the continued demand for aircraft in a global rearmament trend led by the United States, Russia, China, and Saudi Arabia.

I particularly like the company’s proven ability (and desire) to raise dividend payouts aggressively over time. The company has hiked its dividend five times in the last seven years, going from a $0.40/share payout to $0.90/share – a 127% increase that’s all the more impressive considering it took place during some of the worst financial conditions the world has ever seen.

BA dropped around 4% during the last shutdown, which suggests buying at $131.95 is a good place to go shopping. However, that’s not quite a steep enough discount for me. Considering that lowball orders are meant to be serious discounts and placed at prices so low others deem them impossible, I’d be more inclined to start buying around $120-$125 per share where there’s strong support dating back to January 2014.

Government Shutdown Lowball #2: Lockheed Martin Corp. (NYSE:LTM)

Headquartered in Bethesda, Maryland, Lockheed Martin is a $64.7 billion defense company that’s a global leader in defense, security, and aerospace technology.  In a promising sign of expansion, the company has begun investing heavily in alternate energy exploration, including compact nuclear fusion.

With a price-to-earnings (PE) ratio of just 18.5 today, LMT is cheap for its industry – and will be an even better bargain if it sees anything like the 7% decline it suffered during 2013’s shutdown. But, again, to really nail the spirit of lowball orders, I believe $185/share would really be great if you can get it.

Government Shutdown Lowball #3: Raytheon Co. (NYSE:RTN)

I’d be remiss not to point out your opportunity to scoop up discounted shares of one of the Money Map Report’s best performers. Currently trading at around $107/share, RTN boasts a PE ratio of just 15.5 – almost a 40% discount from the industry average, according to Yahoo!Finance. That means that this $32.6 billion defense contractor is already extremely cheap – and a shutdown-induced dip could make it even more of a screaming buy.

Like Boeing, RTN is a dividend star, having raised its payouts seven times in the last seven years. But its payout has grown at a rate that surpasses Boeing’s, at 141% growth in the same time frame. Even better, its payout ratio is a mere 36% according to Yahoo!Finance. That suggests there’s plenty of room to climb higher.

A quick look at the chart tells me that there’s support around $91 a share dating back to last August.

As always, if you fill any of these orders, I want you to do two things straight away: 1) smile knowing you swooped in at a huge discount to what other investors are paying today; and 2) immediately implement a trailing stop that’s 25% below your purchase price to protect your capital and your profits.

In closing, financial buffoonery has been a part of government since the dawn of time and another shutdown is par for the course.

This time around, though, you’ll be prepared even if the government isn’t.

Until next time,

Keith

18 Responses to The #1 Reason to Love a Government Shutdown – Double-Digit Profits

  1. David Savu says:

    If these defense stocks become a bargain, why implement trailing stops?

    • Keith says:

      That’s a great question, David. Thanks for asking.

      Two reasons:

      1) Trailing stops are a safety mechanism just like the seat-belts in your car. You want to have them in place at all times but hope you never need them; and,

      2) Studies show that using trailing stops results in better performance over time than not because they introduce discipline that is otherwise missing for most investors.

      The knock, of course, is that sometimes you get bounced out of positions but that doesn’t change the fact that they’re a performance enhancer. More sophisticated investors can accomplish the same thing with put options or inverse funds, too.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. fallingman says:

    Absolutely. You never have to worry about war profiteering going out of style … until maybe every last penny of tax receipts is going to pay for interest on the debt.

    Like Slim Pickens in Dr. Strangelove, it’s time to saddle up and ride this baby all the way to ground zero. Geehaw. Is this a great country or what?

    God forbid we shut the government down. Like cancer, it’s always best to let it keep metastasizing. That way it consumes everything. Don’t want to leave a job half finished.

    • Keith says:

      Well put. I saw a great bumper sticker recently…”re-elect no one” that pretty much sums up what a lot of people are feeling at the moment.

      Best regards and thanks, as always, for being part of the Total Wealth Family, Keith 🙂

  3. vincent says:

    Keith ; do you still recomende ktos thank you

    • Keith says:

      Hi Vincent.

      That’s a great stock and I overlooked it as I was preparing this article. Thanks for the reminder.

      KTOS got beaten up last quarter over a revenue decline related to the sale of its electronic products business. A quick review still suggests there’s a lot of potential, especially since it’s getting beaten down ahead of the shutdown, too. Seems to me that a lowball order could really set up some terrific potential here as well.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. Robert in Vancouver says:

    It seems logical to think the US Dollar would drop due to the huge and growing US debt, and fiscal mis-management. But no matter how many US Dollars get printed and how much debt gets piled on, the US Dollar continues to get more valuable.

    I’m looking at it from a Canadian point of view. We have a balanced budget plus a nice surplus, and our national debt is being paid off. But the Canadian Dollar has dropped about 35% compared to the US Dollar over the past 3 years.

    You might say it’s due to the lower price of oil, and Canada is an oil based economy. But oil is only 15% of our economy and there are still plenty of jobs and profits in our oil industry. So oil pricing is not a big factor in our overall economy.

    I think the world has changed and the only thing that has real hard value anymore is the US Dollar.

    Not gold, not oil, not land, not minerals, not water, and not agricultural products. Canada has enormous amounts of those things but they do not boost the value of our dollar at all. Everything is going down compared to US Dollars.

    So if I was an American, I would be getting and keeping as many US Dollars as I could. Don’t listem to the doom and gloomers saying the US Dollar is going to drop and you will all be in the poor house. I think they are just trying to sell you something, not trying to help you.

    In fact, you can print as many trillions of US dollars as you want. The world will gooble them all up and ask for more.

    • Keith says:

      Well said Robert. The USD may be the best looking horse in the glue factory but it’s still the place the world turns when the stuff hits the proverbial fan. At least for now anyway…

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  5. David G. says:

    My question is if these Co, are going to fall why would we not short them using Put Options on a short time frame
    I look forward to your response .

    • Keith says:

      Good morning David and thanks for asking.

      There’s no reason in the world why you couldn’t purchase put options on these very same stocks. Just make sure you’ve got appropriate risk management in control because buying commits hard capital to the trade while waiting simply allows you to choose your opening yet not risk anything in the meantime.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  6. bill says:

    have a LOT to LEARN and a lot to read up on, at our age every penny we can get no matter how small will be good for us.

    • Keith says:

      Hello Bill and thanks for taking the time to post your thoughts.

      Your comment is very apropos … we all have things to learn and hopefully, together, we will.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  7. Aidan says:

    Hi Keith,
    Just wanted to say thanks for the great article. I look forward to making some money on those companies you covered.

    Also thanks to Vincent as KTOS is a company I missed out on before when you guys had previously recommended it. Time to get onboard with them now as the outlook on this unstoppable trend is sure set to continue.

    And finally thanks to fallingman – one of the best descriptions of a government I have read in a long time! Had me in stitches!
    Cheers.

  8. RT says:

    Seems to me instead of putting in a stop-loss order at 25% below the buy price it would be better to put in another buy order at 25% down. These are great companies and buying more at a steep discount seems better than getting stopped out at a loss.

  9. Max R. says:

    How about including VXX as a good low ball candidate? What would be an interesting start buying price here? Thanks

  10. Susan says:

    Shouldn’t Northrop Grumman be included as well?

  11. Max R. says:

    Dear Keith: I placed the 3 low balls you suggested to cover the shutdown. I´ve read some news in the sense that there´s “no assurance there won’t be yet another shutdown showdown in December” Would you say it´s convenient to keep those trades open till Dec? Thanks,

  12. NBP says:

    If we are so confident about these stocks, could we use the tactic of averaging out our positions in the downside, instead of trailing stops?

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