NEW YORK ( TheStreet) -- With a big new spending bill slated for passage it could be a good time to lock and load defense stocks into your portfolio -- but knowing which will fortify your holdings and which will leave you vulnerable to setbacks is key.
"With the pinch of the Budget Control Act slated to ease, and both the White House and Congress bickering about how to spend more money on defense and not whether to spend more money on defense, we continue to see the sector in the early days of a modest positive budget inflection," Deutsche Bank (DB) analysts wrote in a May 21 research note.
The House passed a $612-billion military spending bill earlier this month, a controversial measure that President Obama has threatened to veto, according to the New York Times. The Senate has voted on its own version of military spending legislation. The two measures need to be reconciled, which could happen this summer, the article said.
"Quarter to date, defense names have underperformed the market by 7% as 1Q results weren't enough to keep 'hide-out' investors interested, the bond proxy trade lost steam as rates ticked up, and a seemingly continuation of the budgetary dysfunction in DC (despite glimmers of hope earlier in the year)," the Deutsche Bank note said. "We see that relative pull back as an opportunity given our view that this is the early days of a positive budgetary inflection" with the investment bank's top picks being Northrop Grumman (NOC), General Dynamics (GD), Huntington Ingalls Industries (HII) and L-3 Communications (LLL).
But not all defense stocks are a buy. The stocks on this list are all small-cap companies, rated "Sell" by TheStreet Ratings. Check out which companies made the list. And when you're done be sure to check out the best defense stocks to buy.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Note: Year-to-date returns are based on May 22, 2015 closing prices.ASTC data by YCharts
1. Astrotech Corp. (ASTC)
Market Cap: $57.6 million
Year-to-date return: 18.5%
Rating: Sell, D+
Astrotech Corporation develops, manufactures, and sells ultra-small mass spectrometers and related equipment for government agencies, research organizations, and universities. The company through utilizing microgravity as a research platform also develops novel therapeutic products.
TheStreet said: "We rate ASTROTECH CORP (ASTC) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, disappointing return on equity and weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- ASTROTECH CORP's earnings per share declined by 37.5% in the most recent quarter compared to the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. During the past fiscal year, ASTROTECH CORP reported poor results of -$0.32 versus -$0.01 in the prior year.
- Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Aerospace & Defense industry and the overall market, ASTROTECH CORP's return on equity significantly trails that of both the industry average and the S&P 500.
- Net operating cash flow has significantly decreased to -$2.59 million or 203.39% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.
- ASTC, with its very weak revenue results, has greatly underperformed against the industry average of 3.4%. Since the same quarter one year prior, revenues plummeted by 95.1%. The declining revenue appears to have seeped down to the company's bottom line, decreasing earnings per share.
- Looking at where the stock is today compared to one year ago, we find that it is higher, and it has outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Turning our attention to the future direction of the stock, we do not believe this stock offers ample reward opportunity to compensate for the risks, despite the fact that it rose over the past year.
- You can view the full analysis from the report here: ASTC Ratings Report