Market Insight: 5 stocks good to know before midterm elections US (part 1)

Mid-term elections (so-called mid-term elections) to the US Congress will be held as early as Tuesday, November 8. Representatives of the Democratic party, from which the current president hails, and the Republican party will compete against each other for seats in the House of Representatives and the Senate. The two parties have different perspectives on economic and social issues, so investors are looking at the possible outcome of the election struggle in a rather nervous manner. All indications are that, as of today, it is the Republicans who have the best chance of taking over the House of Representatives. As for the Senate, the market consensus is to maintain the status quo, i.e. a 50/50 split Senate with the vice president having the deciding vote. However, it's worth considering all possible scenarios and picking out companies or sectors that might gain (or lose) from a particular party's victory.

Scenario No. 1 - Republicans take over the House of Representatives

Even in a divided Congress, there may be room for bipartisan cooperation on several key policy priorities that could potentially create new opportunities and risks for investors over the next two years or longer. One such area is defense.

With the ongoing war in Europe, bipartisan agreement on potential increases in federal defense spending can be expected, dictated by the need to catch up with US foreign competitors in this area. From 2000 to 2020, China increased its annual defense spending by 513%, while U.S. spending increased by only 64%. This raises an interesting prospect for U.S. aerospace and defense stocks, which are highly correlated with U.S. defense spending.

1. Boeing Co. (BA.US)

Boeing is a well-known manufacturer of jets for civil aviation. As such, it has run into trouble in recent years after a number of crashes and safety investigations of several models of jets produced. However, the company has a significant business segment focused on the defense industry, which has helped stabilize Boeing's finances. The company's armaments segment focuses primarily on the production of manned and unmanned aircraft and missiles. Given the nature of the current conflict in Ukraine, there should be significant opportunities for additional sales of both drones and missiles. Necessary to rebuild Boeing's market position is the restoration of full operations in the commercial jet production segment, but an increase in sales of military equipment could significantly improve the company's financial position. Nevertheless, a possible victory for the Republicans could mean an increase in arms spending not only due to the conflict in Ukraine, but primarily to maintain its position as a global military power in the face of a dynamically rearming China. Source: xStation

2 General Dynamics Corp (GD.US)

General Dynamics is a diversified defense contractor, and is also a leading supplier of goods and services to NATO. In recent years, NATO has awarded the company a contract to run its information and cloud systems, and has placed orders for hundreds of tactical transport units. The war in Ukraine has reinforced NATO's importance as an effective deterrent against invasion by more countries in Europe, which could boost the North Atlantic Pact's spending. Moreover, in June, General Dynamics received a $133 million contract from the Army for bomb components. The company is valued at P/E = 20.52 with a dividend yield = 2.12%Source: xStation

3 Lockheed Martin Corp (LMT.US)

Lockheed Martin is the undisputed powerhouse in the US defense industry. The company also holds long-standing government contracts to supply military equipment. For example, the F-35 fighter jet it produces, which accounts for 30% of the company's revenue, is expected to remain in service until 2070. With a market capitalization of more than $117 billion, Lockheed Martin is a symbol of the industry, the company is valued at P/E = 13.25 with a dividend yield = 2.70%.Source: xStation

4 Raytheon Technologies Corp (RTX.US)

Raytheon, like Lockheed, is a leading contractor and provider of services related to the defense industry. The company has carved itself out as a major player in the wake of the war in Ukraine and the expense of rearming the Ukrainian military. Its position in the arms market is linked to the Stinger anti-aircraft missile program. The United States has transferred a large part of its existing stockpile to Ukraine and European allies as support against hostilities by Russia, leading to a significant depletion of the U.S. reserve of Stinger missiles. To address this problem, the United States has signed a new $625 million contract with Raytheon to replenish its stockpile of these key missiles. While the $625 million contract is not in itself a spectacular amount for a company of Raytheon's size, it does raise awareness of the capabilities the company will have in the future as countries replenish and strengthen their defense capabilities. The company is valued at P/E = 19.67 with a dividend yield = 2.52%Source: xStation

5 Textron Inc (TXT.US)

Textron is a company that manufactures civilian and military helicopters and business jets. Despite the drastic discounting of the company's shares due to the COVID-19 pandemic, a significant opportunity to improve its performance is the Future Attack Reconnaissance Aircraft program. Textron is competing with Lockheed Martin for a lucrative contract with the U.S. Army, with the winner to be determined in 2023. Textron is also facing opportunities for future deals with the Navy and Marines. The company is valued at P/E = 17.11 with a dividend yield = 0.13%Source: xStation