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Jim Cramer's Action Alerts PLUS

Lockheed Gets Winged by Downgrade

By Jim Cramer and Jack Mohr | 11/30/15 - 01:22 PM EST
Stocks in Focus: LMT

Shares of Lockheed Martin (LMT:NYSE) are selling off in today's trading session, largely due to a downgrade at Barclays from Equal Weight (equivalent to Hold) to Underweight (equivalent to Sell).

At the core of the downgrade is that the analysts struggle to see the case for further upside in the stock given the sustained rally in share price and especially when compared to peers whose stocks may not yet have gotten the boost from the secular growth in defense -- such as General Dynamics (GD:NYSE), which has underperformed and therefore offers greatest risk/reward profile for investors. The report also discusses a lower- trending margin profile (although we would point out that this comes coupled with strong growth across the company's segments). That being said, the analysts still love LMT management, its strong and growing portfolio, and its proven track record of performance; they just do not know if there is room to justify further outperformance.

Why do we bring this up? We know it can be concerning to see a position significantly underperform the market in any given day, so we want to make sure to update subscribers on the news when we can and provide our view on whether the selloff is of particular concern. In this case, while we understand the view of the analysts at Barclays, our view on LMT has not changed. In fact, we would even consider bulking up the position if we weren't already carrying a full boat in the name (and if you are new to the product, today's selloff could be one of few opportunities to build the position).

We recognize that LMT shares have appreciated considerably over the last couple of months, but we expect the secular growth trend to continue into next year and LMT is set to benefit as the best company in the group.

As an example, the Pentagon recently noted that it expects the Canadian government to allow Lockheed's F-35 fighter aircrafts to compete to replace Canada's aging CF-18 jets, demonstrating the importance of cooperation among the allies in order to tackle increasing terrorism threats (a deal with LMT would surely improve Canada's air power). Lockheed wants to continue to expand its order book beyond USA, and the opportunity to do so is becoming increasingly more available as countries look to bolster their defense systems. On top of this, the prospect of potentially rebidding (and perhaps winning) the big bomber contract is nothing to ignore.

All in, LMT is the largest and most liquid name in the group (with steadily increasing dividends), and with growth expected to continue for the foreseeable future, it is likely to remain a favorite safe haven for investors in this market where the only thing certain seems to be uncertainty.


Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUS was long LMT.

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