Article Summary:

  1. North Korea’s effect on the market.
  2. Opportunities in the Defense Sector
  3. Put Options will give us a better entry price

Kim Jong Un has lost his mind again and launched a ballistic missile towards Japan last night.  Proving once again that he is crazy and that he has the means and desire to eventually launch a missile towards Guam, a US Territory.  So, how do his actions affect our stock market?  As of this morning, Tuesday, August 29, 2017 the Dow opened up down 118 points.  As of 11:30 am, its down just 2.61 points.  Fortunately, the jitters were minimal. 

Those who were alarmed seemed to rush into gold, which is traditionally a safe place to be when there is fear in the stock market.  Gold opened up over 1% this morning.  Here is my opinion on gold (it’s my opinion NOT a recommendation.  Tom Vilord is not your advisor, so I cannot and will not give advice):  Gold is a hedge, not a long term play.  It has performed better than inflation over the long term, but it has underperformed equities (Source: Inflationdata.com).   So, if you are scared by North Korea, do this:  1.  Get a dog.  2.  Buy Gold.  An ETF like GLD could do the trick.  If you want to earn potentially higher returns than inflation, invest in equities.  The five year return on GLD is (5.06) and the 10-year return is 6.64%.  The S&P performed much better over that same time period growing at 13.90% and 7.79% (Source:  Morningstar.com, GLD vs. SPY).

President Trump has said that he wants to spend $550 Billion dollars on military and defense spending.  If you want to take advantage of that spending and what could continue to happen with North Korea, there are a few Aerospace and Defense ETF’s (Exchange Traded Funds) that could benefit from this situation:

iShares Aerospace and Defense ETF, ticker ITA

SPDR S&P Aerospace and Defense ETF, ticker XAR

Powershares Aerospace and Defense ETF, ticker PPA

Direxeon Aerospace and Defense ETRF, ticker DFEN

 

If a diversified ETF isn’t your thing, then some of the top names in each of the ETF’s mentioned include the following companies:

Boeing, BA.  A++ Value Line Rating

United Technologies, UTX.  A++ Value Line Rating

Lockheed Martin, LMT.   A++ Value Line Rating

Raytheon, RTN.  A++ Value Line Rating

General Dynamics, GD.  A++ Value Line Rating

Northrup Grumman, NOC.  A++ Value Line Rating

Rockwell Collins, COL.  A+ Value Line Rating

L3 Technologies, LLL.  B++ Value Line Rating

Transdigm Group, TDG.  B+ Value Line Rating

Honeywell, HON.  A++ Value Line Rating

Ball Corp, BLL.  B++ Value Line Rating

 

I love ETF’s because of their diversification and very low fees.  However, in a time like today when the market is close to record highs, many of the stocks within an ETF are overvalued.  They are trading at a stock price higher than what they are worth.  I looked at many of the companies listed above, and sure enough, most are overvalued.  There are a few in here that appear to be trading at a fair value, a stock price that is very close to where the stock should be priced.  As value investors, we do NOT buy anything overpriced or fairly priced.  We want to buy great companies (and most of these are great companies as you can tell by the Value Line Financial Strength Ratings) at a discount price. 

One of the companies I purchased over a year ago was United Technologies.  I purchased shares at $86.  Today they are trading at $117.  Some may think that this could be a good entry price especially since Yahoo Finance has a one-year price target at $127.90, Morningstar has target price at $129, and MSN Money and Tip Ranks both have a target price at $130.  I don’t want to buy more at this price.  I want more shares, but at a lower price than $117.  Here is what I could do:  I can wait for a pullback and buy more shares if that happens or I could sell a Put Option.  A Put Option means we are obligated to buy shares of stock at a specific price anytime between now and a future expiration date.  For that obligation, we collect a premium.  I looked at the one-year Put Option expiring in September 2018 and the $110 Strike Price will pay me $5.85 per share.  Here is what could happen:  The price of UTX stays where it’s at, it goes up, or it goes down, but not further than $110.  If any of these three scenarios play out, I do not have to buy any more shares of UTX.  However, I do get to keep the premium of $5.85.  That would reduce my cost basis of $86 down to $80.15.  I made almost $6 a shares without having to do anything or lay out any money.

The second scenario is that UTX does fall below $110.  That is ok for me too, because I love the company, I want to buy more shares, but I want to buy more shares at a better price.  If UTX falls below $110, then I have to buy it.  The premium I collected, $5,85, reduces my cost basis on the new shares from $110 to $104.15.  I would much rather pay $104.15 than $117.

That is how I am going to play the North Korea situation.