Market appetite for BAE Systems (LSE: BA) has lifted off in the wake of Donald Trump’s victory in the US Presidential election.
And it’s not difficult to see why. The incoming commander-in-chief’s belief in creating a ‘stronger’ America was epitomised by his September speech to the Union League of Philadelphia, where he claimed he would reverse defence budget caps introduced in 2011 and draw up a fresh spending plan that would see the US buy hundreds of new ships, submarines and planes.
On top of this, Trump’s rise to the Oval Office has led to speculation that arms spending across the West could be about to rise. While the US and UK have long criticised the low level of defence spend by NATO nations, the President-elect’s strong rhetoric during the campaign trail — Trump even described the bloc as “obsolete” at one point — could finally prompt nations to put their hands in their pockets.
These expectations have pushed BAE Systems’ share price to fresh peaks of 613.5p per share earlier this month and, although the defence giant has cooled down since, the stock remains 10% higher from when the polls closed.
But whether or not Trump boosts spending to the levels he has targeted, I reckon the outlook for BAE Systems, and indeed the wider arms sector, remains extremely promising. The increasingly-expansionist policies of Moscow and Beijing, for instance, as well as terrorist actions, mean that the West has no choice but to continue building up its arsenals.
Despite recent share price strength, I believe BAE Systems remains quite undervalued given this backdrop. And my assertion is backed up by City forecasts — the firm is expected to enjoy an 8% earnings rise in 2017, resulting in a P/E rating of 14 times, below the FTSE 100 prospective average of 15 times.
And a dividend yield of 3.7% also beats the big-cap mean of 3.5%. I reckon there’s plenty more fuel in the tank for BAE Systems to keep rising.
The Pru keeps performing
I also reckon Footsie insurance giant Prudential (LSE: PRU) has what it takes to build on the stunning gains of recent weeks. The firm’s share price has advanced 16% since the start of the month, and the stock hit its highest for 2016 this week above £15.40.
Investor confidence in The Pru’s growth prospects were underlined in the firm’s latest trading statement this month. The financial goliath advised that new business profits in Asia exploded 23% during January-September, continuing the steady growth trend that has been underpinned by rising wealth levels and canny product development in these regions.
And Prudential continues to aggressively expand overseas to deliver robust long-term earnings expansion — indeed, the company’s CITIC-Prudential Life Insurance joint venture made its first foray into the rapidly-growing Anhui province in China in recent days.
Strong global demand for Prudential’s products is expected to blast earnings 13% higher in 2017, resulting in a mega-cheap P/E ratio of 13.4 times. I believe this makes the insurer one of the best-priced growth stocks out there.
