Sod’s law strikes me again with the seemingly unstoppable BAE Systems (LSE: BA) share price slumping the moment I added the stock to my portfolio earlier this year.
Only I could buy the FTSE 100‘s number one defence stock in the middle of a global crisis and end up with an instant (paper) loss.
I bought BAE Systems on 7 March and again 8 May and I’m down 8.48%. Loyal BAE investors won’t know what this feels like. Its shares are up 19.25% measured over the last year and 120.03% over three. Why always me?
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Can it fight back next year?
Enough self-pity. I didn’t buy BAE hoping to make a quick buck. I plan to hold the shares for as long as human beings keep fighting each other. Given human nature, my holding period will probably be forever. It’s sad but that’s the way of the world.
In the long run, I expect this to be a top performer. I also have the consolation that my reinvested dividends will pick up more stock at the reduced price. But why has BAE fallen?
In a trading update on 12 November, the board confirmed it remained on course to hit upgraded underlying operating earnings growth of 12-14% in 2024. Its order intake remains “solid” with around £25bn booked year-to-date.
BAE sells arms to governments in the US, UK, Europe, Middle East and Asia Pacific. With global tensions high and defence spending rising, it reports a “robust pipeline of opportunities across all our sector key markets”.
I didn’t need a trading update to realise that. All I needed to do was turn on the news, with Syria the latest flashpoint. Yet still my BAE shares fall. They’re down another 2.28% today.
Mixed views
BAE’s largely a victim of its own share price success (exactly as I feared). On 24 May, Bank of America Merrill Lynch downgraded the shares from Buy to Neutral citing their high valuation after a strong run.
On 29 November, it downgraded them again to Underperform, citing potential US government spending cuts overseen by Elon Musk’s Department of Government Efficiency (DOGE).
Others are more optimistic. On 2 December, Citi reiterated its Buy rating, saying that a 4% drop in BAE shares “following a competitor downgrade” made them look even better value.
Citi said that it understood DOGE concerns but felt BAE has “similar expected profit growth to US peers” and “better free cash flow conversion”, at a cheaper price.
BAE Systems looks good value to me too, trading at a price-to-earnings ratio of 19.45. I bought at more than 22 times. I wouldn’t dream of selling. I’d happily average down but don’t have spare cash this side of Christmas.
BAE Systems’ shares could tank if global peace breaks out, but in that unlikely event I’ll be too busy celebrating to care. The grim truth is that I expect the stock to fly higher in 2025.
