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Investing in Government Contractors

Government Contracts

There is no bigger consumer in the United States than the federal government. The sheer amount of money the government spends on subsidies and goods is enough to make any business’ mouth water.

 

The Screen Itself

How should we go about finding companies that are likely to be receiving government contracts?

 

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We first start with four industries that we know the government spends a lot of money in.

 

· Waste Management

· Aerospace and Defense

· Agriculture

· Regulated Utilities

 

When I think of the government, one of the first words that come to mind is stability to some degree. I don’t expect the government to completely default and for the United States to dissolve into Anarchy anytime in the near future. Therefore, I want to find companies who exhibit a sort of a stability that may or may not be provided by the government. I can do this by looking for companies that offer a dividend, have a positive net income 1q, and companies whose net income hasn’t really changed over the past five years.

 

The Results

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This is of course, not all of the companies that are subsidized by the government – a few major players are missing like Lockheed Martin. However, this list is fairly powerful in terms of the fact that these companies are reliant on the government, and the government is likely not going to let any of them fail.

 

How well does it do?

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Over the past 17 years, this screener has done incredibly well – in my opinion. Hilariously this screen returned exactly 500.00% over the past 17 years compared to the S&P’s 113.99%. This strategy averaged over double the S&P annually. Better yet, these government contractors were able to return this with only a slightly higher standard deviation than the S&P.

 

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Heading on over to the backtest by time, we can check to ensure that the strategy doesn’t perform well simply because there was a single great year. For a good strategy we want to rely on consistency rather than luck. This screen looks to beat the market pretty consistently year after year, with only a few where it lost more than the S&P.

 

Overview:

This strategy isn’t yet investable, but it has offered some wonderful insights into the world of “subsidized companies” Once we tweak the screen and validate it to ensure consistent performance we may even show up on our low beta screens list.

Tyler McCain
Tyler McCain
A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

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