Gyroscopic Investing

I want to add a few Defense Contractors to my VP to "tilt" towards that in my overall portfolio (since they are obviously included in TSM and SP500).

Which does the board recommend? Honeywell seems to be a mixed play since they also do consumer products as does GE so I want to avoid both. Looking for pure plays ideally. No Boeings for example.

You want to look at Northrup Grumman, Lockheed Martin and General Dynamics.

MachineGhost wrote: You want to look at Northrup Grumman, Lockheed Martin and General Dynamics.

Those 3 and Raytheon are already on my radar 

Any others?

TripleB wrote: Any others?

http://washingtontechnology.com/toplist ... /2012.aspx

Rockwell Collins (COL) has a big private sector component to its business (which may not be what you are going for on a macro level) but they are very profitable. All of the other big defense names have ROIs around 10% whereas Rockwell has a ROI of 16%. ROI is my go to metric for a firm because ROI>WACC=Economic profits for shareholders. If you have a low ROI you better hope your firm has a low WACC.

Lockheed Martin always seemed to have the most influence in the aviation area and beyond, from what I saw.

melveyr wrote: Rockwell Collins (COL) has a big private sector component to its business (which may not be what you are going for on a macro level) but they are very profitable. All of the other big defense names have ROIs around 10% whereas Rockwell has a ROI of 16%. ROI is my go to metric for a firm because ROI>WACC=Economic profits for shareholders. If you have a low ROI you better hope your firm has a low WACC.

This isn't a question/comment about COL, but just stocks in general.

If the ROI is larger, than isn't it already priced into the stock?

Also, won't the WACC for a larger SP500 company always be lower than for a mid/small/micro-cap company? In theory the bigger company can borrow more cheaply because it's bigger and more established so banks/investors view it as having less risk.

I've done well with Lockheed/LMT, although I didn't do a heavy analysis before I bought it. I wanted some aerospace, and I bought it when the share price had taken a beating.

TripleB wrote:

melveyr wrote: Rockwell Collins (COL) has a big private sector component to its business (which may not be what you are going for on a macro level) but they are very profitable. All of the other big defense names have ROIs around 10% whereas Rockwell has a ROI of 16%. ROI is my go to metric for a firm because ROI>WACC=Economic profits for shareholders. If you have a low ROI you better hope your firm has a low WACC.

This isn't a question/comment about COL, but just stocks in general.

If the ROI is larger, than isn't it already priced into the stock?

Also, won't the WACC for a larger SP500 company always be lower than for a mid/small/micro-cap company? In theory the bigger company can borrow more cheaply because it's bigger and more established so banks/investors view it as having less risk.

In an efficient market everything would already be priced in, which would making picking them pointless  Since this is the VP forum, I think you have to reject EMH for your speculations otherwise why the heck are you doing them? Kind of like mental compartmentalization. So for the purposes of speculation I would try to find companies with a high spread between ROIC and WACC ( this spread  is also called the Economic Value Added) and attempt to find companies that will continue to exploit this spread and that are not too expensive.

I agree that larger companies are going to have a lower WACC than smaller companies all else equal.

melveyr wrote: I agree that larger companies are going to have a lower WACC than smaller companies all else equal.

How do you find their WACC? Is it explicitly listed in the 10K or do you have to estimate it based on an algorithm (like weighted average of existing long term debt interest rates)?

TripleB wrote:

melveyr wrote: I agree that larger companies are going to have a lower WACC than smaller companies all else equal.

How do you find their WACC? Is it explicitly listed in the 10K or do you have to estimate it based on an algorithm (like weighted average of existing long term debt interest rates)?

You are going to have to calculate it on your own. It is a pretty long and annoying process. I haven't done it myself, but I will get back to you if I end up doing it at some point. My school has access to a Bloomberg terminal and you can look it up there. I think the hardest part is coming up with the cost of equity because it is never explicitly stated; the cost of equity is the opportunity cost for the investors.

Although both Obama and Romney are creatures of the military industrial complex and supporters of perpetual war as a foreign policy, I would be a bit cautious about banking on military spending remaining the financial waterfall it has been for the last fifty years.

http://www.msnbc.msn.com/id/49404306/ns ... IRYJYaOxyx

TripleB,

Another interesting way to judge a companies history of value creation is to look at the market value of equity vs. the book value of equity.

Market Value Added = Market Value of Equity - Book Value of Equity

This is a cumulative measure, but it is interesting to see which companies have been good stewards of capital (AAPL, XOM) and which ones haven't (BAC, C). They only trade at a premium to book value of equity if they have generated economic profits over time (ROIC>WACC).

melveyr wrote: You are going to have to calculate it on your own. It is a pretty long and annoying process. I haven't done it myself, but I will get back to you if I end up doing it at some point. My school has access to a Bloomberg terminal and you can look it up there. I think the hardest part is coming up with the cost of equity because it is never explicitly stated; the cost of equity is the opportunity cost for the investors.

Since you have access to a Bloomberg terminal, I'd like you to run a backtest using your strategy and post the results here.

MachineGhost wrote:

melveyr wrote: You are going to have to calculate it on your own. It is a pretty long and annoying process. I haven't done it myself, but I will get back to you if I end up doing it at some point. My school has access to a Bloomberg terminal and you can look it up there. I think the hardest part is coming up with the cost of equity because it is never explicitly stated; the cost of equity is the opportunity cost for the investors.

Since you have access to a Bloomberg terminal, I'd like you to run a backtest using your strategy and post the results here.

Haha, I don't have a strategy! I don't have a VP  But, all else equal you want to hold a firm that has a higher EVA spread rather than a low or negative one.