Defense stocks have already fallen hard in the two weeks (plus) since the debt deal from August 1st announced $350 billion in defense spending cuts. Obvious stocks to come under pressure by this announcement are Northrop Grumman Corp (NYSE: NOC) and Boeing Co (NYSE: BA). But while defense spending cuts could climb up to $1 trillion due to a clause mandating another $500 billion in defense cuts if lawmakers fail to agree on an additional $1.2 trillion in deficit cuts by year’s end, plenty of other industry sectors will suffer as well.
I have found three stocks in different industries and sectors that will be significantly affected by the planned government spending cuts. Given the recent market volatility it is important to note that each of the following three stocks are arguably near-term oversold and could bounce significantly. However, the broader message of this article is to avoid these stocks on at least a medium-term basis or until the government starts to significantly increase spending again.
Oshkosh Corp. (NYSE:OSK) designs and builds an array of specialty vehicles. From fire and emergency vehicles to dump trucks, military transportation trucks, and much more, Oshkosh Corp. does it all. The problem? Almost 50% of its sales are to the government. With all the spending cuts planned, you better believe that new fire truck will have to wait to be purchased.
Sector: Consumer Cyclical
Industry: Auto manufacturer
On the five year weekly chart we note that Oshkosh Corp. (NYSE:OSK) this year broke its multi-year support around $24.50 (horizontal blue line). While as mentioned above this stock could well be near-term oversold, the longer-term chart is broken and that favors investors to sell the rallies as opposed to buying the dips.
Illumina Inc (NASDAQ:ILMN) is in the sequencing, genotyping, and gene expression business. If that sounds too complex, essentially the company creates technologies used to perform certain genome and RNA analysis. It sells these life science technologies and services to research centers (government sponsored and private), academic institutions, and other biotechnology companies. Still too confusing? Think CSI Miami. The company has 80% of its sales to the government and that doesn’t bode well when the government cuts spending.
Sector: Consumer Non-Cyclical
On the four year weekly chart we note that the stock is currently roughly 30% off its 2011 highs and due to the recent broader market selloff and has come down to support around the $49/$50 area. Medium term however this chart is broken and any bounce should be contained.
Riverbed Technology, Inc. (NASDAQ: RVBD) has a series of products that enable its customers to improve the performance of their applications and access to their data over so called WANs (wide area networks). Such wide area networks are often used by businesses and governments to relay data among people in multiple geographic areas around the world. The company has 25% of its sales to the government.
Industry: Computers – Communication Equipment
On the four year weekly chart note the sharp sell-off the stock has already had this year; roughly -40% since mid July. While just like the Illumina Inc (NASDAQ:ILMN) and Oshkosh Corp. (NYSE:OSK), Riverbed Technology, Inc. (NASDAQ: RVBD) has the potential for an oversold rally in the near-term, the longer-term chart however is broken and rallies can be used to sell into.