HomelandDefenseStocks.com Q&A Interview with
Scott Sacknoff, SPADE Defense Index and #Aerospace & #Defense
ETF Discussing Defense Sector
Point Roberts, WA and Delta, BC - January 3, 2020
(Investorideas.com Newswire) Investorideas.com, a global news source and
leading investor resource releases an exclusive Q&A interview through its
defense portal HomelandDefenseStocks.com.
Read this in full at https://www.investorideas.com/news/2020/defense/01031Interview-ScottSacknoff.asp
Q&A
Interview: HomelandDefenseStocks.com
(HDS) Scott Sacknoff (SMS)
HDS: With us today is Scott Sacknoff, manager of
the SPADE Defense Index ( DXS), the underlying benchmark for the Invesco Aerospace
& Defense ETF ( PPA). Let’s
start with a recap of 2019. The stock
market had one of its best years on record.
Please tell us how the aerospace and defense sector performed.
SMS: Better
than most people realized. The returns
in the sector went largely unnoticed during 2019 as much of the attention
seemed to focus on Boeing and its troubles with the 737 Max. By the time the
year ended, the value of the SPADE Defense Index was up 40.02%, meaning it
outpaced the 28.88% return of the broader stock market by double digits.
HDS: Outperforming
the market seems to be a common thread in your past interviews.
SMS: It is.
We just ran the decadal numbers and from 2010 through 2019 the Index
outperformed the S&P500 by 125.05% [314.79% vs. 189.71%]. From 2000 through 2009, the defense sector
had a price gain of 97.1% vs a decline in the S&P500 of 24.11%. This means it outperformed it again by over
120% [121.18%]. This means that
regardless of which party held the White House or Congress, through the
presidencies of [George W.] Bush, Obama, Trump and switches in the House and
the Senate, aerospace and defense continued to be the sector to invest in for
two decades and counting.
HDS: Why is
that? Sectors normally go through
rotation periods when they are out of favor with investors.
SMS: They do;
but spending on aerospace and defense operates differently than most economic
sectors, and that is still a concept lost by many investors. There are essentially two main drivers to how
the sector will perform. The first is
the perception of world stability. The
more dangerous and unstable the world seems to be, the more likely it is for
nations around the world to spend money on defense and security to protect its
citizens and their “way of life”. Whether it is a local terrorist attack or
conflicts around the world in disparate locations, the ability of news outlets
to update viewers on what is happening tends to make people nervous. This leads to support for funding the budgets
of Defense and Homeland Security. Political party doesn’t really matter. When the perception is “we need to protect
ourselves” budgets are strong. When the
perception is “the world is a safer place” budget support declines. And the last time the US felt that the world
was truly a safer place was at the end of the Bush Sr. administration when the
Soviet Union fell.
The second is commercial aerospace. This is dependent
on global economic activity but influenced by other factors including the level
of global trade; the cost for upgrading aircraft versus the reduction of
operating costs by airlines using more advanced, fuel-efficient planes; and
expanding interest in “experiences” versus owning items by citizens in
wealthier nations which can increase the load factors for airline
operators.
HDS: Staying
on this topic for a second, can you address the impact of what happened in Iran
and Iraq this week?
SMS: Earlier
this week, an Iranian general was assassinated by the U.S., an action which
took place roughly 10,000 miles away from its own borders, but it immediately
influenced the perception of stability here in the U.S. Although this general
is widely seen as a person responsible for a lot of death and misery over the
past 20 years, the question now arises of what is next? How does Iran plan to respond? Iran has historically been more involved in
influencing actions behind the scenes instead of in direct conflict. This could mean anything from supporting an
attack on Saudi Arabian oil fields, funding cyberterrorists to influence the
upcoming elections in the U.S., arresting British citizens, causing turmoil in
the Straits of Hormuz to impact oil transport, causing an incident in Israel; or
directly attacking U.S. citizens…we really don’t know. These are the conditions that create concern
that lead toward support for spending on security.
HDS: Getting
back to the returns in the sector. Who
were the biggest winners and losers?
SMS: Looking
at 2019, there were 25 firms in the SPADE Defense Index that gained more than
40%. These were led by Vectrus (up
137.5%), Triumph Group (119.74%), and KBR (100.92%), each of which more than
doubled during the year. The prime
contractors were noticeably further down the list led by Lockheed Martin at
#15, whose price increased by 48.7%. CACI, a leading defense digital technology
firm was up nearly 74%. In contrast to
prior years, it was a number of mid-cap firms that drove the returns. Only three firms in the index were down for
the year led by Intelsat which lost 2/3 of its value after the FCC announced
its intent—which is being challenged by a number of firms—to take back digital
spectrum and auction it, without adequate compensation to the firms controlling
that spectrum. Essentially it is a land grab,
but it highlights the risk associated with firms operating in a market area
that is dependent on a large client such as the government and/or
regulations. As far as the 2010-2019
period, AXON, formerly TASER, was the clear winner gaining 1573%. Northrop Grumman, Boeing, and Lockheed all
gained more than 600% over the decade.
HDS: Let’s turn our attention to 2020. How do you see the year shaping up going
forward?
SMS: Considering
it is a presidential election year and the two major parties in the US have
significant differences and animosity toward each other, at least publicly, and
it is likely that political rhetoric will dominant the conversation. As such, I anticipate some volatility in the
sector based on the news, however the actual impact to the companies
themselves will be minimal during 2019 considering the firms are operating
under budgets and plans that are already established.
I also believe, as the past two decades have
highlighted, that the world stability remains precarious as there are hot spots
around the globe which will continue to raise concern and, so to speak, put a
floor under any declines in defense spending that might be considered in coming
years. Internationally, defense spending
has risen over the past several years and the U.S. has been a willing supplier
to its allies and other nations. This
provides additional support to defense contractors and manufacturers as the
revenues from contracts go predominately to the companies, not to the US
government where a significant portion of the defense budget is allocated to
personnel and internal operations.
I envision that North Korea and Iran will remain
hot spots; there will be continued tension with China over trade and military
actions in the Pacific region; there will be flare-ups in the Middle East;
Russia will continue to try and exert its influence on the world scene; and the
troubles in Central and South America, such as we’ve heard about in Guatemala,
Honduras, and Venezuela will remain.
Elsewhere, it will be interesting to see how Brexit plays out in 2020 as
well as the great divide between right and left political parties, in a number
of nations, evolves. All of these add to
the wall of worry that likely means stability for the defense sector.
As far as the commercial side of the sector, much
of it revolves around Boeing--the reaction to how and when the 737Max is
brought back into service, and whether Congressional inquiries put pressure on
the firm, continuing damage the firm has already brought onto itself, or if the
firm can go back to producing half the world’s aircraft.
HDS: Looking
at the future of defense technology, what themes do you see increasing in
importance?
SMS: The
ones that immediately come to mind are hypersonic weapons and the defense from
hypersonic weapons, cyberprotection of digital data and electronics, and which
of the hundreds of new space players will emerge as the next great public
companies.
HDS: Any
final thoughts?
SMS:
Aerospace and Defense has proven, over at least the past two decades, to
be a place for investors to achieve substantial gains as well as providing
portfolios with insurance against an unstable world.
HDS: Thank
you for your time. Scott Sacknoff manages the SPADE Defense Index which serves
as the underlying index for Invesco Aerospace & Defense ETF (NYSE ticker:
PPA). Additional details on the Index, the firms included in it, and their free
SPADE Investor newsletter can be
found at spadeindex.com/defense.
This interview does not constitute an offer of an investment
product. SPADE Indexes makes no representation regarding the advisability of
investing in vehicles based on any of its indexes including the SPADE Defense
Index. All information is provided ‘as
is’, for information purposes only, and is not intended for trading purposes or
advice. Neither SPADE Indexes nor any related party is liable for any
informational errors, incompleteness, or for any actions taken based on the
information contained herein.
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