Short Sellers Up the Ante On These 2 Defense Stocks

Defense stocks General Dynamics Corporation (NYSE:GD) and L3 Technologies Inc (NYSE:LLL) have seen increasing pessimism in recent weeks

Mar 3, 2017 at 3:31 PM
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While the broader U.S. stock market trades near record levels amid the "Trump rally," some sectors have been receiving extra attention based on the president's agenda. For example, President Trump has frequently promised to increase military spending, which would be a boon to defense stocks. Just one look at a chart for the SPDR S&P Aerospace & Defense ETF (XAR) shows Wall Street's bullish hopes for the sector, with the exchange-traded fund (ETF) rising close to 18% since before the election to trade at $68.55, touching a record high of $69.94 yesterday. 

defense etf chart march 3

But even with XAR's impressive rise on the charts, it appears some traders have been taking a bearish stance on a number of defense stocks of late, illustrated by sharp increases in short interest. Two such stocks are General Dynamics Corporation (NYSE:GD) and L3 Technologies Inc (NYSE:LLL)

Starting with GD, short interest on the stock rose by 27.4% in the last reporting period alone. Now, taking a broader view shows that this dramatic jump comes after weeks of declining short-interest levels, but it's not the only place pessimism has picked up on the shares. For example. the stock has a 10-day put/call volume ratio of 1.87 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which ranks in the elevated 89th annual percentile. In other words, puts have been bought to open over calls at a faster-than-usual clip.

During the past two weeks, the March 185 put has seen the largest rise in open interest, and data from the major options exchanges confirms substantial buy-to-open activity. In other words, speculators are betting on -- or hedging against -- GD shares breaching $185 by the time front-month options expire at the close on Friday, March 17. 

Indeed, it's certainly possible General Dynamics Corporation shareholders scooped up protective puts, given the stock's meteoric rise over the past year. Specifically, the shares are up 40% in the past 12 months, and hit a record high of $193.17 on Wednesday. GD stock was last seen near $189.53. 

As for LLL, short interest jumped by an astonishing 61.7% in the last reporting period, and is now at its highest point since last April. Meanwhile, short-term options traders are unusually put-skewed, with the shares' Schaeffer's put/call open interest ratio (SOIR) of 1.29 ranking just 19 percentage points from an annual put-heavy extreme. 

There's even a bearish tilt in the analyst community. At the moment, six of 11 brokerage firms rate the stock just a "hold," even though it's been rising fast on the charts. Year-over-year, L3 Technologies Inc (NYSE:LLL) is up 40% to trade at $167.79, and hit an all-time best of $171.24 just yesterday. 

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