Is Now the Time to Sell Oil and Defense Stocks?

On the March 9 episode of The Morning Filter, David Sekera and Susan Dziubinski discussed the recent surge in oil and defense stocks and whether there’s still opportunity for investors in those sectors. Here is an excerpt from the show.

Defense Stocks Rise After Attacks on Iran

Susan Dziubinski: So let’s talk a little bit about some of the sectors and industries that you alluded to earlier that did pretty well and not so well last week. We’ll start with defense stocks. Now, of course, those did rise early last week in light of events. Was that a good investment move? Any opportunity left here?

David Sekera: Well, that just reminds me of that old Warren Buffett adage: You should be buying when others are selling, and selling when others are buying. So in my mind, now is not the time to be buying stocks like defense stocks. If you think about defense stocks, the way those companies really make their big money is selling entire defense systems, not necessarily the munitions. I mean, using up the munitions, of course, they’ll have to replace that, but that’s not where the bulk of their earnings come from.

I mean, realistically, the time to buy those defense stocks was over the course of last year. We recommended a number of defense stocks a number of times. Valuations at that point were much lower. We had Trump, a year ago, twisting the arms of a lot of allies to buy US defense goods. The EU had committed at that point in time to increasing their defense spending as a percent of GDP. So looking at some of these individually, like Lockheed Martin LMT, Northrop Grumman NOC, those stocks are up 40% to 50% since we recommended them. So, in my mind, you don’t need to sell down your entire position, you can let some of it run, but I think now is actually a pretty good time to start taking profits in some of those.

Is There Opportunity in Oil?

Dziubinski: Oil has, of course, broken through the hundred dollar a barrel mark, so has Morningstar made any changes to its oil forecast due to the war? And then, secondly, is there a case to be made for investing in oil-related stocks today?

Sekera: For now, there’s really nothing that changes that supply/demand curve over the long term or what our assumptions were when we think about the long-term case for oil. So, for now, no change to our long-term forecast. We’re still looking at $60 for West Texas, $65 for Brent. And of course, in our model, we don’t think that we can guess any better what oil is going to do in the short term. So for those oil companies we cover, we use the two-year forward strip curve in the model, and then we adjust that price in year two to what our year price is in year five.

As far as investing in oil today, I mean, considering oil prices have almost doubled over the past couple of weeks, I’d probably be a better seller than buyer here. I think now is probably a good time to take a little bit of a profit, but I certainly wouldn’t sell my entire position here. So if you remember, oil stocks did a lot of nothing most of last year, yet we continue to keep recommending a position in the oil sector. Originally we were recommending Exxon Mobil XOM. And then, once that moved up enough to go into 3 stars, we moved to Devon DVN, a good US producer. Generally, the thesis there was that the stocks were undervalued. You were getting good dividend yields while you waited for them to perform. Plus, they provided a good natural hedge in your portfolio in case inflation were to rise or if geopolitical risk were to get worse.

So when I think about oil stocks, they’ve done what we’ve wanted them to do. They’ve been you a good hedge in your portfolio against geopolitical risk. So depending on the recommendation date that you go to when we made those recommendations, and we’ll see where stocks go this week, but they’re up anywhere from 30% to 50%. So I think now’s a good time. Take a little bit of profit off the table. There’s still a lot of momentum to the upside, so you don’t need to sell your entire position. But again, I’d take a little bit off the table. And that way you’ve got some additional dry powder to reinvest in those other areas in the market that are still getting hit pretty hard.

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