By Marin Hubert (McGill University) and Tyler Prahm (University of Nevada, Reno)
Stock Name: Lockheed Martin
Ticker: NYSE: LMT
CMP: $337.70
Recommendation: Hold
Target: $330-360
Timeline: 2-3 weeks
Company Overview
Lockheed Martin Corporation is a leading global security and aerospace company headquartered in Maryland, United States. Their mission is to “solve complex challenges, advance scientific discovery and deliver innovative solutions to help our customers keep people safe.”
The company is organized into four main operating units: Aeronautics, Missiles and Fire control, Rotary and Mission Systems, and Space. The biggest unit in terms of sales is the Aeronautics unit, which includes tactical aircraft, airlift, aeronautical research and development lines of business.
Over the course of 2020, Lockheed Martin increased their sales by 9% to reach a record of $65.4B over one year. This increase is mainly explained by the strong increase in sales coming from the Aeronautics and Missiles and Fire Control segments. Lockheed Martin’s EPS experienced double-digit growth over the course of 2020, rising from $21.95 in 2019 to $24.5.
Notably, in the fourth quarter of 2020, net sales and operating profit coming from the Space unit totalled $3.24 billion and $0.368 billion. This represents an increase of respectively 14% and 42% compared to Q4 2019.
On December 31st 2020, Lockheed Martin’s cash and cash equivalents totalled $3.16 billion, representing a 109% increase compared to their cash position in the end of 2019.
Investors should expect this cash position to decrease as it was announced on December 20th 2020 that Lockheed Martin entered into an agreement to acquire Aerojet Rocketdyne in an all-cash deal. Aerojet Rocketdyne is a developer and manufacturer of advanced propulsions and energetic systems. Some of their main customers include the U.S. department of defense and NASA. With this acquisition, Lockheed Martin reinforces its willingness to become one of the major players in the Space industry.
It is expected that Lockheed Martin Corporation will be included in the new ARK Invest Space Exploration ETF launching in the near future. This would be a major bullish catalyst for LMT stock as it would bring a lot of buying pressure from institutions and retail investors.
Product Offerings Snapshot
Lockheed Martin Corporation offers a wide range of products including aircrafts, electronic warfare, radar, missile defense, and others. As we said earlier, their biggest business segment in terms of sales is the Aeronautics segment. This one includes military aircrafts but also revolutionary commercial aircrafts. In recent years, Lockheed Martin put a lot of emphasis on developing its Space division. Some of the products proposed as part of this last one include satellites and spacecrafts for government and commercial customers.
Sector and Industry Overview
Index: iShares U.S. Aerospace and Defense ETF (ITA)
Weightage in Index: 5.32%
Index Comparison Analysis
Graph 1: Lockheed Martin compared to iShares U.S. Aerospace and Defense ETF (Tradingview.com as of February 13, 2021)
Although Lockheed Martin (LMT) is part of the S&P 500 index, it can also be compared to the iShares U.S. Aerospace and Defense ETF (ITA), where it holds a high 5.32% weightage. Within the past few months among each of the two securities, LMT (highlighted in orange) has continuously dropped in price. While, ITA (highlighted in blue) has steadily consolidated in price. Due to LMT’s selloff, it may be considered oversold due to the divergence among itself and the sector. In the past year, LMT has had some considerable trouble following ITA's overall trend. Ever since August, 2020, LMT has continuously followed a downtrend from its original price of nearly $400 a share. Whereas, ITA has continued on an uptrend from around $85 a share to its current price of $97.94 a share.
Moving Averages Analysis
Graph 2: iShares U.S. Aerospace and Defense ETF with simple moving averages (Tradingview.com as of February 13, 2021)
Excluding the sell-offs from the Covid-19 pandemic correction of March, 2020, ITA has continuously followed an uptrend to all-time highs. While looking at the moving averages in November, 2020, ITA experienced a crossover of the 25dMA (highlighted in blue), 50dMA (highlighted in green), and the 100dMA (highlighted in red). This roaring uptrend brought ITA’s price from a low of $74.50 a share to a high of $97.58. In late January, the 25dMA crossed under the 50dMA resulting in a bearish reversal. However, this reversal is in the midst of correcting and forcing another 50dMA crossover of the 25dMA. If this crossover occurs, ITA may continue its uptrend until the moving averages cross again in the future.
Support and Resistance Analysis
Graph 3: iShares U.S. Aerospace and Defense ETF with recent support and resistance levels (Tradingview.com as of February 13, 2021)
Looking at the 3M1D chart, ITA developed strong support levels of $91.75 and resistance levels of $97.50. Within the past few weeks, ITA broke through its $97.50 resistance and is consolidating around that level. Given the recent roaring uptrend leading up to the breakout, ITA experienced massive upward volatility. This bullish volatility may act as a leading indicator for a future uptrend to occur if ITA remains above its new support level of $97.50.
Trend and Pattern Analysis
Graph 4: iShares U.S. Aerospace and Defense ETF with support and resistance trend (Tradingview.com as of February 13, 2021)
Dating back to December of this year, there is a clear downtrend. This downtrend consisted of multiple bounces off of the 2M support resulting in a bullish reversal favoring the recent breakout of the resistance. If the breakout on ITA were to be a false breakout, ITA would more than likely breakdown back to its previous levels of support in the $88 range. This trend consisted of 4 bottoms dating back to December 21. After ITA’s second bottom on January 2, 2021, it continued a reversal upwards until ultimately reaching resistance of $97.50 and breaking back down. However, due to the certainty of the previous run that ITA underwent, it’s possible that it may maintain the new level of support and could continue an uptrend at the $97.50 mark.
RSI and Stochastic Analysis
Graph 5: iShares U.S. Aerospace and Defense ETF with RSI and Stochastic analysis (Tradingview.com as of February 13, 2021)
Looking at the 4H Stochastic Oscillator (bottom chart), the 3dMA (orange) the oscillator value (blue) is above the 3dMA (orange). Any crossover between the 3dMA and the oscillator would indicate a reversal. Given the current trend of the oscillator, it’s currently on a steady downtrend from its previous overbought level above 75. There is no visible bullish reversal for the Stochastic Oscillator. Assuming the oscillator continues its steady downtrend, it may become closer to becoming oversold. On the 4H RSI, however, the chart barely touched it’s overbought level at 70. If the oscillator were to continue to decrease, the RSI has a high chance of following along. There is no sign of a divergence among either the RSI or the Stochastic Oscillator.
Macro-Level Trend Analysis
Graph 6: The comparison between iShares U.S. Aerospace and Defense ETF, Northrop Grumman, and Lockheed Martin. (Tradingview.com as of February 13, 2021)
Lockheed Martin’s competitor, considered for this analysis, is Northrop Grumman, $NOC (highlighted in orange). Just like LMT (highlighted in green), NOC has continuously sold off in recent months to similar levels. Meanwhile, ITA (highlighted in blue) continues its steady uptrend. Based on the comparison between the three main trends, both NOC and LMT are considered to be oversold. Since LMT is a completely separate entity from NOC, LMT’s downtrend has no exclusive negative fundamental factors to its own company vs. NOC. As a result of this, the two equities within the sector are undervalued and have the potential to begin an uptrend to fit the overall trend of ITA.
Technical Outlook for the Stock
Support and Resistance Analysis
Graph 7: Lockheed Martin with recent support and resistance levels (Tradingview.com as of February 10, 2021)
We look at the 6M price chart for LMT in order to identify the medium-term key levels of support and resistance. Through the end of 2020, LMT stock decreased because of the overall negative sentiment regarding the aerospace sector. Still, LMT managed to limit its losses under 3% over that period whereas the sector as a whole lost nearly 5.3%. In the beginning of 2021, the stock price rose due to the announcement of a large contract completion ($731M) along with the positive expectations regarding their Q4 earnings to be announced on the 26th of January.
However, the solid but disappointing for some investors numbers announced on that date caused the stock to dip and reach the lowest price observed for this stock since the start of the Covid-19 pandemic in March 2020. Since then, LMT bounced off its long-term support level at $324.5 and has been trading upwards, mainly due to the overall bullishness of the market in early February. It recently broke the immediate $340 resistance level.
Graph 8: Lockheed Martin Corporation with Fibonacci levels (Tradingview.com as of February 10, 2021)
The strength of the Fibonacci levels can be confirmed for key levels of support at the 0.382, 0.500 and 0.618 retracement levels. In fact, one of the key levels of support for LMT is $324.5, which corresponds to the 0.618 fibonacci retracement level. Thanks to the pullbacks observed on LMT in the beginning of 2020, the Fibonacci retracements are accurate in their description of the long-term support and resistance levels and confirm our previous analysis.
Trend and Pattern Analysis
Graph 9: Lockheed Martin Corporation with trend and pattern analysis (Tradingview.com as of February 10, 2021)
LMT has been in a downtrend since March 2020 and the start of the Covid-19 crisis, which majorly impacted the industrial sector as a whole. We can see on Graph 9 that LMT stock has made lower highs while maintaining the strong $324.5 support level except in March 2020, and more recently, on the 29th of January 2021. The strong downtrend observed along with the strong support level is an indicator of a descending triangle formation. This indicates that the demand for the asset is weakening, but that investors are not willing to let the price sink below $324.5.
Although this pattern is generally a sign of trend continuation, bullish fundamental news regarding LMT could cause a strong upward breakout over the next month. More recently, we can observe that LMT has been trading inside a strong regression channel (91.1% of observations). There was only one instance in late October where LMT managed to force a false breakout of the trend. The false breakout is identified from its bearish gap-downs on for a 5D period. These red candles were then met with bullish candles pushing the stock back in the channel. Watching the $324.5 level in the coming weeks will be important as we might observe a breakout from this downward channel due to the strong number of buyers willing to enter at this price level.
Graph 10: Lockheed Martin Corporation forecasted price change (Toggle.ai as of February 13, 2021)
Furthermore, based on the analysis conducted on Toggle.ai, the price pattern observed since last September is a sign of reversal in the trend. Toggle is a software that estimates future price patterns based on how the price behaved in the past. In the case of LMT, the downtrend observed since September 2020 is a strong indicator of reversal in the trend for the coming months. Toggle predicts that the price will not fall below its actual value over the 6-month time horizon, and expects an average high of 13.4% return over that period. In the best-case scenario, it has an expected increase in the stock price of 19.9%, while on the worst-case scenario, the stock price is predicted to be similar to its current value. The price is expected to reach a range of about $380-$390 over the next six months.
Moving Average Analysis
Graph 11: Lockheed Martin Corporation with long-term moving averages (Tradingview.com as of February 10, 2021)
In the midst of November, LMT experienced a bearish crossover of its 50dMA (blue) under its 100dMA (light blue) and its 200dMA (yellow). This crossover initiated the bearish channel in which the stock has been trading ever since. Before this crossover, we can see LMT traded sideways for approximately six months. Another bearish crossover was observed in the beginning of January with the 100dMA (light blue) crossing below the 200dMA (yellow). The Graph 10 confirms our analysis of the trend for LMT as we can clearly see the stock price trades below its three long-term moving averages. The 50dMA (blue) should also be considered as a resistance level going forward and a breakout from this level could indicate a reversal in the trend. Graph 12: Lockheed Martin Corporation with short-term moving averages (Tradingview.com as of February 10, 2021)
On a short-term outlook, LMT stock has bullish potential. We can observe on Graph 11 that the stock is trading above its 10dMA (blue), 25dMA (light blue), and 50dMA (yellow) for the first time in the last 3 months. This is a strong indicator of a short-term bullish trend. The bullish crossover happened between the 2nd and 4th of February after the stock bounced back from its $324.5 support level. Since then, the 25dMA (light blue) has been acting as a solid support for the stock. A continuation in the bullish short-term trend observed could drive the longer term moving averages to cross in the coming days, indicating a reversal of the long-term trend and continuation of the short-term bullish trend observed since the beginning of February.
RSI and Stochastic Analysis
Graph 13: Lockheed Martin Corporation with RSI and Stochastic analysis (Tradingview.com as of February 13, 2020)
Graph 13 shows the Relative Strength Index and the stochastic oscillator for Lockheed Martin Corporation in the last six months. The first one (middle chart) indicates that LMT stock was oversold in the beginning of February. As mentioned earlier, this is when the stock bounced off of its long-term $324.5 support level. Since then, the RSI level has been in an uptrend and is currently sitting at an average level of 51. The stochastic oscillator (middle chart) is in a downtrend after making a new top in the overbought region in the first week of February. The crossover observed in the overbought region signals a potential short-term correction in the price.
Further, investors should closely monitor the evolution of the Bearish hidden divergence observed between the price and both the RSI and Stochastic Indicator. In fact, as the price makes lower highs since the of 2021, the two indicators make higher highs. This is generally a bearish signal as it indicates that the stock price tried to reverse with strong bullish momentum but didn’t manage to make higher highs. However, we cannot yet call this an exhaustion pattern as the RSI is still in average levels and there is still room for momentum to push the price in higher highs. Overall, investors should expect a small correction in the following days for LMT, shown by the downtrend in the stochastic oscillator, which will be a great opportunity to enter into a position.
News Event Box
February 8 2021: Cathie Wood’s popular ARK Invest recently purchased LMT shares bringing the portion of the fund invested in Lockheed Martin Corporation to 2%. Many believe further purchases will come in the near future due to the new space exploration ETF by ARK Invest.
February 12 2021: Pentagon’s research arm awarded contracts to the three main defense giants Lockheed Martin, Nortrop Grumman, and General Atomics to develop an air-launch missile-packed drone.