David DriscollNorthrop GrummanNOCDON'T BUYNov 02, 2018

He doesn't like the traditional hardware defense stocks, especially if they are up a lot like NOC.

The US defence budget rose this year and likely next. NOC is closely tied to US Defence. Is a steady dividend aristocrat that will continue to do well.

Returns almost 20% over the past 10 years. A great, long-term chart. Are tensions in the Middle East, Ukraine and China encourage defense spending. So it's a growth story. Enjoys insider spending.

Has since sold shares. Not a consistent business. Indirect proxy on US military spending, but business not performing. Very complex projects that capital intensive, and hard to make profits. Fixed price contracts during inflationary times is hard on the business. 

Demand for products strong given emphasis on defensive technology (geopolitical tensions). Does not own shares anymore. Not a concern with fundamentals - but seeing better value in other names. ~87% of revenue from US government - very stable. However, valuation too high. 

The US defence budget is not constrained by the overall US budget. They're upgrading through their stealth bomber and their space program are drivers. They had an issue with a fixed contract. However, NOC gets access to US defence spending, the highest historically in the world. The only negative is that you have to buy this in inflated US dollars.

Defense is a moat oligopoly with barriers to entry. NOC owns long US Defence Dept. contracts and they own the intellectual property of their defence technology. They operate in 4 segments like space and defence which are predictable and stable. Revenues are stable; 86% of sales are with the US government. They have an $80 billion backlog. Shares pulled back 24% from last year's peaked, but have stabilized. They're grinding through a $1.2 billion cost overrun of the B-21 bomber, fixed-price contract. But a catalyst in 2024 is them likely getting the contract to build the next generation of fight jets. Shares offer returns of 13% compounded historically.

Off nearly 20% YTD because investors fear spending restraints on defence by Washington.

European defence budgets rose after Russia invaded Ukraine. Also, NOC upgraded its B-21 bomber, upgraded its nuclear business as well as its space program. They buy back shares and consistently grow their dividend. Good management that benefits from steady government contracts.

(Analysts’ price target is $504.71)

They will have a great year. People underestimate how much money we're spending on defending Ukraine against Russia, and there will be more spending to re-arm them.

It has fallen so far, especially compared to peers Lockheed and Raytheon (both of which he likes). Would buy at these levels.