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A Wells Fargo analyst downgraded shares of Lockheed Martin (NYSE:LMT) and L3Harris (NYSE:LHX) after turning more cautious on the defense stocks.
The analyst sees a “difficult” 2023 setup for this sector taking into account the U.S. budget environment, in addition to the “significant downside potential if tensions ease.”
“Investors may think of defense stocks as a hedge for market downturns, however their track record in this area is not good. During 10%+ market corrections in the past 20 years, defense has modestly outperformed on average (~4%), although underperformed more than 50% of the time, a much worse hit rate compared to consumer staples or utilities stocks,” the analyst said in a client note.
Lockheed Martin shares are cut to Underweight from Equal Weight with a price target of $415, up from $406.
“We see a portfolio likely to under-grow peers, particularly if it doesn’t win the Future Vertical Lift FLRAA contract where it is incumbent on Black Hawk (expected in October).”
On the other hand, L3Harris is downgraded to Equal Weight Overweight with a price target of $238 per share, down from $272.
“We expect supply chain delays to linger and aren’t sure what might get investors excited again,” the analyst added.
Elsewhere, the analyst has reiterated his Overweight rating on General Dynamics (NYSE:GD) and Equal Weight on Northrop Grumman Corp (NYSE:NOC).
Shares of LMT and LHX are down 1.2% and 1%, respectively, today.
