Working for the Man Doesn’t Seem to Be Paying Off – Federal Contractors Don’t Prove to Be Good Investments

The day you die is just like any other, only shorter.

 --Samuel Beckett

Those of you who follow my blogs know that periodically I have been checking up on the performance of Government contractors in the stock market. You may also remember the government contractor proxy I was using to measure returns was an Exchange Traded Fund (“ETF”). But last year that ETF died, and so I lost my proxy. See  https://www.awrcounsel.com/blog/2023/3/20/dont-look-now-the-government-contractor-etf-is-gone?rq=fedx . Now my days are actually longer trying to figure out how U.S. government contractors are doing as an investment thesis.

So, what has happened since I last looked at this a fiscal quarter ago?  Without any good ETF proxy to follow, let’s look first at the largest pure government contractor, Bethesda’s own Lockheed-Martin Corporation (symbol: “LMT”) which I see is now down -5.11% so far this year. That extends its losses from the late  March 2023 report. The second biggest government contractor is Raytheon, just renamed RTX this week (and trading under the eponymous stock symbol “RTX” ), which  is down -4.25% year to date.  I guess furnishing five batteries of Patriot Missiles to Ukraine isn’t enough to boost the bottom line. But if that is not good enough, the question is what would be enough to eke out a gain in this market. Maybe the malaise is a function of the defense contractors, albeit the top 10 federally funded recipients are mostly in the defense industry, albeit with a minority working in some healthcare-related angle. The  prime example of that is the number four recipient of federal funding, Pfizer (symbol “PFE”), which  is down -28.95% so far this year. That is a case of long COVID coming to an abrupt end. And notably, while the tech market is booming, these mainstay businesses are slouching downward in the last week.

What does it mean? Again, it is clear few are getting rich off a land war in Europe involving an American proxy. Safe to say, there is little or no financial evidence of war profiteering among defense contractors. And in a new future era of 1% debt ceiling increases and budget constraints, there is no reason to think that civilian Government contractors are about to break out of their slump. The new normal is likely the same as the old normal – continued not so inspiring performance by government contractors in the public stock markets. And that is the situation before even the erosion by inflation. It is just a fact, that in 2023, most of the out performance of the stock market has gone to a few technology stocks like Nvidia and Tesla. These riches are not trickling down beyond five or so tech stock names. The narrow breath of the stock rally here in 2023 suggests it might well be short-lived. And in any case, there seems to be no room at the inn for the government contracting community.

I am thinking a recession, which the consensus no longer thinks is imminent, is what it will take before investors start thinking about government contractors as opposed to the mania in tech stock names.