Skip to comments.If you Own These Stocks, Then Get Out NOW
Posted on 05/05/2012 6:02:32 AM PDT by SeekAndFind
With European economies slumping anew, investors have been figuring out ways to trim their exposure to that region. Business conditions are weak and could spiral even lower in coming quarters before an eventual rebound. That's why I wrote this article, which says that you should revaluate holding shares of U.S. companies that derive more than one-third of their revenue from Europe, as it may see sales fall below forecasts in coming quarters.
Yet Europe isn't the only concern. In roughly eight months, another major source of revenue may experience real trouble. Of course, I'm talking about the U.S. government, which is on the cusp of a major pullback in spending so that it can get the federal budget into balance.
These defense contractors have been scrambling to line up foreign customers, but have only made moderate headway: Raytheon (NYSE: RTN), SAIC (NYSE: SAI), Northrup Grumman (NYSE: NOC), Lockheed Martin (NYSE: LMT) and L-3 Communications (NYSE: LLL) all derive more than 80% of their revenue from Uncle Sam.
Meanwhile, investors have poured back into defense stocks, figuring they are inexpensive based on 2012 sales and profit forecasts. But with zero or even negative growth prospects, they aren't a bargain at any price.
As of now, the Department of Defense looks set to shrink 3% to 4% in each of the next five years. This doesn't even include spending drops associated with the U.S. troop withdrawal from Afghanistan. Whether these cuts are more focused on personnel or equipment remains to be seen, but the leading defense contractors are vulnerable because they are counting on expensive plane and ship programs that may get the budget ax.
Health care spending will plunge
It's not just defense stocks that will feel the pain of reduced government spending. As of now, Uncle Sam will make an equivalent $492 billion in cuts in other parts of government as well. Again, lawmakers may manage to come to an agreement, averting these massive cuts, but investors should expect at least some degree of spending cuts.
At least 40% of the currently planned $984 billion of cumulative spending cuts through 2021 will be borne by the health care industry. Regardless of how the Supreme Court rules on the issue of President Obama's health care plan, spending cuts are coming.
A decade of rising costs has been great for drug companies, insurers, hospital operators, software supplier and many other players in the industry. The coming decade should represent a reversal of fortune for them as pricey drugs, six-figure surgical procedures, diagnostic testing services and extended patient stays within facilities are just some of the areas slated for cutting.
Companies at risk: Insurer Humana (NYSE: HUM) derives roughly 75% of revenue from Medicare and Medicaid reimbursement; Dialysis services firm DaVita (NYSE: DVA) gets 66% of revenue from the government, while this figure stands between 40% and 50% for Tenet Healthcare (NYSE: THC) and United Healthcare (NYSE: UNH).
And there's more...
The for-profit education sector is hugely vulnerable in light of the growing debate of whether these institutions are delivering a sufficiently robust education for the tuition they charge. Some lawmakers hope to see reduced government support for student loans, which would lead to drops in enrollment for these institutions. DeVry (NYSE: NYSE: DV), for example, has 80% of its revenue base tied to government-sponsored student loans. This figure is more than 30% for the Washington Post (NYSE: WPO), which runs the Kaplan Education services division.
Lastly, companies that sell products to government research labs are quite vulnerable to a spending drop as well. These include Life Technologies (Nasdaq: LIFE), Thermo-Fisher (NYSE: TMO) and Sigma Aldrich (Nasdaq: SIAL).
Risks to Consider: As an upside risk, government cuts won't be nearly as severe if lawmakers instead decide to largely focus on tax increases to close the budget gap, which looks awfully unlikely.
Action to Take --> Many of these companies lack visibility into the long-term ramifications of a smaller government, and instead are relaying what business conditions look like right now. Investors would be wise to exit any government-focused stocks before the topic becomes more widely discussed in investment circles and share prices plunge.
SAIC stock has been in the crapper since they went public.
Shame, it used to be a great company to work for.
The packaged bankruptcy of Hawker Beechcraft this week is an early example.
For those who don’t know...
SAIC works extensively with the United States Department of Defense, the United States Department of Homeland Security, and the United States Intelligence Community, including the National Security Agency, as well as other U.S. government civil agencies and selected commercial markets.
Given that nearly everything moves in lock-step these days, I’d say that a more complete list would include 500 of the stocks on the S&P 500 index and 30 of the stocks on the DJII.
I see absolutely no sign of cost-cutting discipline on the part of the federal government.
Anywhere there’s a government dollar and a half eaten ham sandwich...
But let’s not talk about NYC and Citytime, or the Greek Olympics, or VCF, or.....
GD wasn’t listed in the article, however they have put a lot of funding into Gulfstream Aerospace in anticipation of the defense cuts and are doing well so far.
This casts doubt on the whole article. Hell will freeze over first.
RE: This casts doubt on the whole article. Hell will freeze over first.
Actually if Obama gets a second term, I’ll believe this when it comes to DEFENSE.
>Of course, I’m talking about the U.S. government, which is >on the cusp of a major pullback in spending so that it can >get the federal budget into balance
I think the article is wrong. First wave, It will be the companies that rely on Euro sales, HPQ, PG and many others.
Even a 15% slowdown will start the next wave of layoffs. Since companies are so tightly bound due to just in time manufacturing, the second much larger round of layoffs won’t be far behind.
I’m not “in” those stocks, but if a blog uses allcaps, then by God they know what they’re talking about.
Dang! I misread the headline as “socks.”
Only the perception of it with sound and fury signifying nothing or at most very little.
Exactly. The worst case, if-no-other-deal-is-reached ‘cuts’ are only lesser level of increases anyway.