Another View of the Sequester and Defense Stocks

Shares of leading defense companies have fallen over the past couple of weeks, as investors have begun to focus on the possible impact of the drastic federal budget cuts coming into effect on March 1.

The market hasn’t been as sanguine as executives at Northrop Grumman�(NOC),�General Dynamics�(GD) and�Lockheed Martin�(LMT) — since Jan. 24, General Dynamics is down 5.6%, while Lockheed is off 5.7% and Northrop’s stock has fallen 3.4%; over the same period the S&P 500 is up 1.5%.

As you can see, though, the stocks have recovered slightly, with gains over the past two or three days. The moves could be some investors buying on the declines, or perhaps a sense that budget sequester, which threatens high single-digit cuts to the defense budget, may not actually happen, at least in the long term.

Via Kevin Drum, there’s this bit of inside the Beltway wisdom from The Hammer himself:

Tom DeLay, the former House majority leader, who was meeting with a few of his former colleagues on Wednesday at the Capitol, says Boehner�s playbook is �sharp,� since defense spending �can always be replaced during the appropriations process, after the cuts are put into place.�

�You can always put money back in for defense,� DeLay says. �I think Boehner is going to stick with the sequester since the cuts are already happening, and if he needs to do something later, he can. I don�t think the president realizes how Boehner has the upper hand.�

In other words, even if the sequester kicks in and stays in place without any deal between Congress and President Obama, House Republicans may just reverse (only) the defense cuts and challenge Democrats to reject them.

This type of strategic thinking could well be why executives and investors aren’t necessarily fearing the worse for defense companies, for now at least. Time will tell, of course, and its likely that even absent a budget deal defense stocks will hold current levels until we’re into March and the reality of the cuts hit.

But for those thinking rosy thoughts, the National Review article has a warning — there are some genuine deficit hawks in the House majority who are willing to do whatever it takes:

Some conservative House members aren�t exactly grumbling about the ax looming over the defense budget. �Oh, this is happening, and that�s fine by me,� says Representative Paul Broun of Georgia. Representative Dave Schweikert of Arizona agrees. At a recent town-hall meeting, he told his constituents that many Republicans are actually quite open to defense cuts.