Defense Contractors Like Rockwell Collins Are Holding Their Breath

Washington’s discretionary budget isn’t the only target of automatic “fiscal cliff” spending cuts. The Department of Defense’s budget is also on the chopping block.

If the cuts are enacted, the DoD will have $55 billion less to spend in 2013 and would be forced to cut $500 billion in spending over the next 10 years.

The possibility of this outcome has many defense contractors worried stiff. Take Rockwell Collins (NYSE: COL) as one example. The company designs and manufactures communications and aviation electronics. Rockwell Collins sells to the private sector, but its main customer is the U.S. Department of Defense, which makes up 43% of the company’s total sales and 57% of its revenue.

While the quickly-approaching fiscal cliff is just now coming into focus for concerned investors, companies like Rockwell Collins have been holding their breath since 2011.

Here’s a look at how COL has traded since 2011:

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When a stock is moving in a relatively clear direction it’s said to be “trending.” In technical terms, this is confirmed by higher highs and higher lows (for uptrends), or lower highs and lower lows (for downtrends).

When you see lower highs and higher lows, instead, that’s consolidation. This happens when the stock’s bulls and bears are equally matched or the market is indecisive.

This is the pattern I’ve seen in Rockwell Collins since 2011. The great thing about consolidation patterns is they can’t last forever. Eventually, the stock will either break higher or lower.

For COL, a break above $57/share would be a bullish sign. Likewise, a break below $48 would spell trouble for this DoD-dependent contractor. It’s unlikely this stock will move much until Washington actually does something. But once the fiscal cliff debacle is resolved, expect a big move in Rockwell Collins.

If you haven’t done so already read the Survive & Prosper issue on “Why the Budget Cuts Will Never Happen.”

 

 

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About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.