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Is the Northrop Grumman Selloff an Opportunity?

Is the Northrop Grumman Selloff an Opportunity?

Northrop Grumman Corporation (NYSE: NOC) has recently faced heavy artillery. No S&P 500 stock has fared worse than the global defense contractor over the first few weeks of 2023.

Not surprisingly, social media chatter around Northrop Grumman is on the rise. Traders are debating whether the -17% year-to-date decline is an opportunity or a sign of more to come. 

A great place to see what people are saying about Northrop Grumman is MarketBeat’s Social Media hub for the company. Recent Stocktwits mentions and Reddit threads can explain why the stock is moving as it is.

While you’re there, swing to the Chart tab for a visual perspective of where the stock has been — and, more importantly, where it could be headed, powered by TradingView, the chart has an extensive library of technical indicators, metrics and strategies that can help create a winning edge.

For instance, adding the Relative Strength Indicator (RSI) on the daily chart reveals that Northrop Grumman has reached extreme oversold levels. The Bollinger Band indicator also suggests the stock is well into oversold territory.

Ok, but how did the stock get there in the first place? Let’s dive into the latest industry headlines and company fundamentals. 

Why is Northrop Grumman Stock Going Down?

Northrop Grumman is one of several defense stocks having a bad January. General Dynamics, Raytheon, L3 Harris Technologies and Lockheed Martin are among the S&P’s worst performers to start 2023. Since these were some of the best performers in 2022, profit-taking is likely at play — but there’s more to the story.

The industry’s downturn began the afternoon of January 6th when it was reported that new House speaker Kevin McCarthy discussed slashing $75 billion, or 9%, from the defense budget. The idea stems from the fact that the defense budget has grown to a record high — and could therefore be in the crosshairs for cutbacks to alleviate sky-high government debt.

After McCarthy was finally voted in, Goldman Sachs downgraded the defense group on expectations of further defense budget pressures throughout the year. The analyst moved his rating from neutral to sell and lowered his price target from $440 to $375. Since the stock was trading above $500, many investors have chosen to exit their positions.

Late last week, the U.S. government announced that it would provide an additional $2.5 billion in aid to Ukraine for armored vehicles and combat supplies. Since this showed a willingness to spend more on the war with Russia, it helped stop the bleeding in Northrop Grumman and other defense stocks. Whether or not this marks an inflection point will depend on future budget headlines.

Is Wall Street Bullish on Northrop Grumman Stock?

The good news for Northrop Grumman shareholders is that the rest of the Street is holding firm so far. Four firms reiterated buy or hold ratings last week with price targets ranging from $460 to $550. At this stage, Goldman Sachs is the only bear, albeit influential.

Perhaps the most bullish Northrop Grumman supporter is Morgan Stanley. The analyst recently noted that despite House Republicans threatening to oppose a bigger defense budget, cuts aren’t guaranteed and could be more moderate than feared. She singled out Northrop Grumman as her top pick in space based on its strong portfolio and exposure to some of the fastest-growing industry segments like nuclear modernization and space. 

When the Russia-Ukraine war escalates and tensions with China are rising, gathering support for defense spending cutbacks could be a tall order. With the GOP barely in control of the House and known to have its share of defense proponents, passing a deep cut may prove difficult.

Even if it does pass, getting approval from the Senate and President Biden could be an uphill battle. For Northrop Grumman shareholders, this is reason to believe the market has overreacted.

Will Northrop Grumman Have Good Q4 Earnings?

One thing that could help restore faith in Northrop Grumman is the company’s fourth-quarter earnings report on January 26th. If it can recover from last quarter’s miss and offer reassurances of strong order flow, the defense budget concerns could take a back seat. 

Q3 earnings fell shy of consensus, mainly due to input cost inflation and increased R&D spending. Despite the first bottom line shortfall since early 2020, management reiterated its full-year guidance — and said it expects sales to grow 4% to 5% and margins to hold steady in 2023.

Most importantly, it exited the period with an $80 billion order backlog likely to have grown significantly, given recent new business wins.

For Q4, the Street will look for 12% revenue growth and 10% EPS growth. While a beat would be nice, the outlook for 2023 will probably carry more weight. Look for Thursday’s morning release to spark an explosive move in this suddenly polarizing aerospace and defense leader. In the meantime, updates from Raytheon and Lockheed Martin two days prior could offer valuable clues.

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