Insider Purchases & Buybacks: NOC

While buybacks are a positive sign, continued buybacks signal that the company truly believes its stock is undervalued. If you are looking for a tipoff from a creditable source, continued repurchase authorizations could fit the bill.

While continued buybacks are a good sign, they have to be weighed against the current backdrop of a possible economic slump. Northrop Grumman (NOC - commentary - Cramer's Take) has announced a buyback and may represent a good buy. (On Stockpickr, you can see the rest of the insider trades and buybacks.)

One of the largest U.S. defense contractors, Northrop has announced a massive share-repurchase program of up to $2.5 billion. This represents more than 9% -- as of Nov. 30, there are nearly 338 million shares outstanding -- of the company's current market capitalization.

Northrop has been aggressively buying back its shares, indicating that it sees good value in its stock. The latest authorization raises the total buyback amount since 2003 to $6.7 billion, of which, the company has already completed the repurchase of 69 million shares worth $4.2 billion.

In October, Northrop announced a 62% jump in its third-quarter net income to $489 million, or $1.41 per share, from $302 million, or 86 cents per share, in the year-ago period. The bottom-line was boosted by higher ship and submarine sales. The company also said that it had orders worth $64 billion on its books.

While the current environment is that of concern over a probable economic slowdown next year, this does not really affect the defense sector. On Friday last week, Northrop announced a $1 billion contract to build the ninth LPD-17 amphibious transport ship. The contract is scheduled to be completed by November of 2011 and includes construction, design, testing and technical issues.

I expect the company to continue to be one of the main beneficiaries of U.S. defense spending in the coming years, and spending is unlikely to decelerate soon, especially with what is going on in Iraq. Even if I were to disregard Iraq, I would expect Northrop to have its hands full with beefing up domestic security.

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At the time of publication, Raznick had no positions in the stocks mentioned, although positions may change at any time.

Jason Raznick is president of Easy Stock Alerts and has been involved with the capital markets for several years. He has worked for Merrill Lynch, Dynamis and Tricap Holdings, a joint venture with Fortress Investment Group. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Raznick appreciates your feedback; click here to send him an email.