All of this has its limits, but, if you are a fan of Professor Nassim NicholasTaleb and his best seller The Black Swan then you already have been warned that the events that have the greatest impact on our lives and our investments are most often unpredictable. We cannot predict the future nor can we anticipate the tragedies that will tank our portfolio's.
While I do believe predicting the future is, how should I say, futile, there are general clues as to which way the wind blows.
The greatest wild cards we have experienced in our history are war, famine, viral epidemics, and terrorism. There are many subplots too. We may not know when they will hit us the worst, but we can be confident they will hit us. The issues of famine and disease may be harsh, but they have not been a major problem on our shores for some time. On the other hand, war and terrorism have caused great turmoil for everyone, everywhere, no matter where it strikes.
Given that we have ranting lunatics in Korea an Iran (not the only ones, just the most visible) and both the Middle East and southeast Asia appear volatile, it stands to reason that any drama in either area will instantly ignite oil prices as well. If hostilities become dramatic or even melodramatic, the defense contractors will get more attention.
Therefore, in anticipation that we can not predict anything specifically I am looking at the major players in each industry as safety valves. As I so often do, first I begin with a theme, then the metrics, then to the specific story for each stock. We've got the theme, so on to the metrics.
Price-to-earnings -- defense (TTM)
- Northrop Grumman (NOC) 9.52
- Raytheon Company (RTN) 9.62
- Lockheed Martin (LMT) 9.92
- General Dynamics Corp (GD) 10.76
- Boeing Co (BA) 13.98
Price-to-earnings -- oil (TTM)
- Chevron Corp (CVX) 10.51
- Petroleo Brasileiro (PBR) 11.10
- ConocoPhillips (COP) 11.36
- PetroChina Co Ltd ADR (PTR) 12.77
- Exxon Mobil (XOM) 12.84
- Royal Dutch Shell (RDS.A) 14.77
Reviewing the P/E ratios gave us little except that the defense sector trades at lower multiples than the energy sector. Perhaps Boeing the defense contractor with the largest percentage of commercial business and Dreamliner delays being outside the range in its group is worth noting.
Next we will compare the top line P/S with the bottom line P/E.
Price-to-sales -- defense (TTM)
- Northrop Grumman (NOC) 0.53
- Boeing Co (BA) 0.57
- Lockheed Martin (LMT) 0.65
- Raytheon Company (RTN) 0.82
- General Dynamics Corp (GD) 0.83
Price-to-sales -- oil (TTM)
- ConocoPhillips (COP) 0.56
- Royal Dutch Shell (RDS.A) 0.58
- Chevron Corp (CVX) 0.97
- PetroChina Co Ltd ADR (PTR) 1.14
- Exxon Mobil (XOM) 1.2
- Petroleo Brasileiro (PBR) 1.8
Surprisingly, if one were to make a buying decision strictly on the basis of the P/S, most of the stocks looks reasonable, and many downright cheap. Only Petroleo Brasileiro seems too high and would be out of contention. This is odd, since the stock is trading near its 52-week low. PBR has made major oil discoveries off shore and created much excitement about its future; however, the government has taken a major position in the company and raised capital by diluting the existing shareholders in creating a massive amount of new shares.
This has in large part contributed to the stocks negative performance all year. Petrobras plans to raise between $15 billion and $16 billion in 2011, Finance Director Almir Barbassa said on Monday, without specifying where the funds would come from. This does not give me much confidence in the coming year, and it's enough to make me take PBR off the list. Further analysis of the these stocks can be read in upcoming posts.
Sheldon Liber is registered architect and the CEO of Chasing Value ™ Asset Management, Inc., a small private investment company. He writes the columns Chasing Value™ and Serious Money.and is on twitter: ChasingValue Disclosure: He owns shares and/or options in PTR, RDS.A, and RTN.