2 Defense Stocks To Watch Amid Today's Sell-Off

Defense stocks like Raytheon Company (NYSE:RTN) and Northrop Grumman Corporation (NYSE:NOC) could benefit from increased geopolitical fears

Jan 6, 2016 at 11:24 AM
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The broader market is again struggling, with fears related to North Korea's bomb test shaking investor confidence. But these fears could actually act as a boon to defense stocks. While we've already noted Lockheed Martin Corporation's (NYSE:LMT) promising start to the day, sector peers Raytheon Company (NYSE:RTN) and Northrop Grumman Corporation (NYSE:NOC) have also been testing positive territory. Let's take a closer look at RTN and NOC to see if they hold any contrarian value

RTN has picked up 0.4% today at $126.28, adding to its long-term success on the charts. Since the shares hit an annual low of $95.32 in early July, they've surged 32.5%, touching an all-time of $129.99 just last month. 

Amid this technical showing, option bulls have made their presence known. The defense stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 4.37 is higher than 79% of all other readings from the previous year. Therefore, not only have more than four RTN calls been bought to open for each put, but this ratio's percentile rank signals the appetite for long calls has been stronger than what's normally seen. 

The brokerage bunch is essentially all in on the stock, as well. Twelve analysts deem the shares a "strong buy," with the remaining two saying they're a "hold." Also, RBC this morning raise its price target on the stock to $149 from $133. Meanwhile, with Raytheon Company's short-interest ratio sitting at just 1.50, there's little sideline cash to fuel a short-squeeze rally. With little negativity on Wall Street, RTN holds little value, from a contrarian standpoint. 

Moving on, after flirting with positive territory, NOC was last seen 0.2% lower at $191.99 -- but like its sector mate, it has been grinding higher on the charts. At this time last year, the shares were sitting at just $148.72. What's more, the defense stock currently hovers just below its record peak of $193.99 from late October. 

However, unlike RTN, options traders have taken a rather bearish stance on NOC. The stock's 10-day put/call volume ratio at the ISE, CBOE, and PHLX is 1.15, meaning put buying has had the advantage of late. Even more telling, this reading sits in the 84th percentile of its annual range. 

There are also some skeptics in the analyst community. While six brokerage firms rate NOC a "buy" or better, the other six that cover the stock say it's only a "hold." As such, Northrop Grumman Corporation could benefit if option bears unwind their positions, or if a round of analysts upgrades comes down the pike. In fact, just this morning, RBC raised its price target on NOC to $219 from $206.

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