Stocktrades Premium Value Call
By Dan Kent
“A particular stock I like (and own) has also just gone through a large drop in price due to some news I feel is overblown, so the timing couldn’t be better.”

Typically, after earnings season closes out, I take the time to analyze Stocktrades Premium featured stocks and come up with what we call the “Value Call” of the quarter.
I didn’t do a value call after the last earnings season, primarily because of the release of our Foundational Stocks Lists and the plethora of other Premium content that got in the way. So, now that we have a bit of downtime in terms of feature releases, I decided it was a solid opportunity to do so.
Keep in mind that my Value Calls are stocks that I believe offer an attractive risk/reward situation at the current time. However, the thesis is a long-term one. The markets are simply unpredictable over the short term, and I’ve stated time and time again that you need to accumulate shares in high-quality companies and reap the benefits over many years and not expect benefits in a few months.
With that said, let’s dive right into the value call thesis and analysis.
My Value Call – Lockheed Martin (LMT)
Lockheed Martin was set to close out 2024 on a high note until there were some critical comments issued by Elon Musk about the relevancy of its F-35 fighter jets.
I’ve attached a stock chart below, and you’ll be able to easily tell when the criticisms were made and when some analysts downgraded their targets as a result.

The company has a wide variety of business segments. However, there is no doubt the F-35s, which are human-manned fighter jets, contribute to a significant portion of Lockheed’s overall revenue.
So, it’s not surprising that when a man who has the influence (and arguably some control now with Trump in power) criticizes the jet, there will be some volatility.
However, I do believe that volatility is something investors can take advantage of.
Elon’s comments may represent the future, but not in the near term
Musk’s arguments against the F-35 were relatively simple. He stated that drone technology was ultimately the future and effectively referred to the F-35 as a piece of trash, highlighted by a trash can emoji.
He goes on to state that the F-35 was built to be the jack of all trades and is now obsolete in the age of drones and will only get pilots killed.
He then went on to make some completely unrelated and borderline inappropriate comments, only to finish it off with the following:
“Some US weapons systems are good, albeit overpriced, but please, in the name of all that is holy, let us stop the worst military value for money in history that is the F-35 program!”
With Musk in charge of overspending, this seemingly poses an issue
Musk has been awarded the creation of the Department of Government Efficiency by Donald Trump, an organization put in place to rid the US Government of wasteful spending.
As a result, it is not entirely surprising that Lockheed has cratered in share price since his comments. However, the question is whether Musk truly has the influence and power to overthrow one of the US military’s cornerstones and fighter jets and cut spending toward it.
I would argue that he doesn’t. Although it is realistic to see future wars and defence strategies focusing more on drones, the technology doesn’t seem fully there yet. Although Trump seems to be generally in approval when it comes to Musk, I do not believe he will overrule what is believed to be the best situation regarding air defence for the United States.
The Lockheed Martin CEO issued a more level-headed statement, suggesting that drones certainly will play a role in future combat and defence efforts but that there will be a slow and methodical approach to this and that the F-35 has highlighted its dominance when it comes to defence in recent times.
He even stated outright that drones, at least at current levels of technology, would have little impact on a Chinese J20 Jet.
Now that we’ve gone over the reason for the drop, I can begin to talk about why I see value
While the company does rely heavily on the F-35, it is not the sole production line of the business. In fact, it has numerous other segments and defence infrastructure it sells, including things outside of defence spending such as its partnership with NASA on the Artemis Space program and the development of the Orion spacecraft.

As you can see, although Aeronautics is the largest portion of the company’s backlog, which would be the segment that includes the F-35 aircraft, it is also the slowest growing.
The company’s missiles, mission systems, and space backlogs are growing at a higher CAGR, suggesting that there is more demand business-wide than just the F-35s.
As you can also see, the company’s backlog is sitting at all-time highs and although it is not represented in the chart above, its total backlog has grown at 6% annually over the last 13 years.
The company’s backlog provides a relatively predictable stream of revenue

Lockheed’s overall backlog accounts for more than twice the company’s annual revenue, as highlighted in the chart above. Although this doesn’t guarantee future revenue generation because these are ultimately unfinished contracts, it would take a material event for a lot of these contracts to go unfulfilled.
Trump’s overall impact on NATO spending and its impact on Lockheed

Lockheed Martin benefits substantially from NATO spending. If we look to deals recently, they include $8B to Germany to purchase F-35s, Canada’s intention to purchase F-35s, and Romania’s recent $6.5B purchase in 2024.
Although the US Government makes up the vast majority of spending, when we look to international spending, it is increasing at a much faster rate.
Donald Trump has stated that he wants NATO allies to ramp up defence spending to 5% of GDP. At this point in time, the target is around 2%.
The one thing we need to understand is that Trump’s 5% target is unrealistic and has almost 0% chance of being hit. However, it is likely a starting number in a negotiation tactic to ensure NATO members are pulling their weight as much as the US.
At this point in time, a good chunk of NATO members cannot even hit the 2% target, around 28% to be exact.
I believe Trump’s main goal here is not to get to 5% but to force countries to at least get to the 2% goal. As you’ve probably noticed, he has threatened brutal tariffs on many countries. His reasonings for the tariffs are broad, but the lack of military defence spending by countries is certainly one of the driving factors.
Lockheed should stand to benefit from an increase in NATO member defence spending. A lot of them deal with Lockheed already, a blue-chip military defence company in one of the most developed nations in the world.
It is difficult to say where the targets will land and what Trump will enforce. But it is safe to say that he will demand some form of increase in terms of other NATO members “pulling their weight” (his words, not mine). As such, Lockheed should benefit.
As a result, I believe Lockheed’s valuation is relatively attractive at this point in time

Many may look at the chart above and tell me that Lockheed isn’t really trading abnormally lower than what it usually does. And to that extent, they would be correct.
At 18.5x free cash flow, we’re about right inline with where we should be from a historical standpoint.
However, with the S&P 500 trading at a 25% premium to historical averages, even “fair” valued companies are relatively difficult to find. And I do feel there are likely added tailwinds here that are not represented in Lockheed’s valuation due to the fact it is witnessing a bit of a drawdown from the Musk comments mentioned at the start of this newsletter.
After some dips in free cash flow generation, the company is now continuing to grow free cash flow on a year-over-year basis. The company has a 10-year compound annual growth rate on free cash flows of 8.18%. However, the impact is felt even more on free cash flow per share.
Why? Because the company allocates a significant amount of capital towards share buybacks. As a result, we have free cash flow increasing by around 60%~ since 2015, but free cash flow per share has increased from $13.23 to $24.80, an increase of nearly 90%.

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Share buybacks and a lucrative dividend make Lockheed exceptionally shareholder friendly
As you all know, I’m not one to focus on dividends. However, I am one to focus on capital returned to shareholders in profitable ways, whether that be via a dividend or share buybacks, because ultimately, that increases your total return (which includes dividends).
The company generates a sizable amount of free cash flow, which in turn allows it to designate a significant portion of that free cash flow to share buybacks.
When we look to the chart below, we can see that Lockheed has repurchased more than 25% of its total shares outstanding over the last decade.

And the best part? It is being amplified in recent times, with 12% of those coming in the last 3 years. As we can tell by looking at the chart, the company’s shares outstanding chart starts to notably dip further down in 2022.
Meanwhile, over that same 10-year time period, the company has returned over 240%, keeping pace with the S&P 500. If we shrink it down to a 3-year time period, we get a return of 35%.
While many investors prefer the luxury of dividends as it is a forced payment to investors while share buybacks can be botched by management, resulting in deteriorating returns, once you find a company that can strategically buy back shares at opportune times, your capital is much better spent internally on those buybacks than it is via a dividend.
However, it’s not like the company doesn’t pay a rock-solid dividend either. In fact, over the last 20 years the company has increased the dividend by 1220%.

If we shrink this down to the last 5 years, the dividend has grown by 37.5%. Not quite the compounding rate investors have been used to over the last 20 years. However, the increase in buybacks, which have proven to be more fruitful, is a net benefit to go along with that 37.5% growth.
Overall, there is risk here of volatility and government policy, but I think it’s overdone
Overall, I think Lockheed Martin’s recent dip in share price presents a compelling opportunity for long-term investors.
While Elon Musk’s criticisms of the F-35 fighter jets have caused volatility, I believe these concerns are overblown, particularly given the role the F-35 continues to play in global defence strategies.
The argument that drones are the future of warfare is valid, but the technology isn’t ready to replace human-manned jets like the F-35 in the near term.
Lockheed’s strength lies in its diversified portfolio beyond the F-35, including its growing missile systems, mission systems, and space exploration projects like the Artemis Space Program. The company’s record-high backlog provides a steady stream of predictable revenue, further insulating it from near-term headwinds.
International defence spending, particularly within NATO, also adds a layer of growth potential. With increasing pressure on NATO allies to meet higher defence spending targets, Lockheed is well-positioned to capitalize on growing global demand.
From a valuation standpoint, Lockheed appears attractively priced compared to broader market averages, especially given the S&P 500’s elevated valuation levels.
While risks such as political policy changes and defence budget adjustments remain, the market’s reaction to Musk’s comments seems disproportionate.
A final comment I will make on Lockheed is that I understand some investors choose not to invest in military industries, and that’s completely fair. Some industries are not for everyone; similarly to tobacco, alcohol, or alternative lending companies, investments must match our morals.