If You Own These Stocks, Get Out NOW!

David Sterman Street Authority May 5, 2012

Bookmark this page | this site Hi, GuestView NewslettersInvestor UpdateDividend OpportunitiesTrade of the WeekToday's Top 5 Investing Ideas$100,000 PortfolioHigh-Yield InvestingHigh-Yield InternationalStock of the MonthThe Daily PaycheckThe StreetAuthority InsiderGame-Changing StocksScarcity & Real WealthTop 10 StocksExploration & PaydirtThe 100% LetterSign inRegister

Subscribers only

Login My Account Home Top Stories Subscribe About Us Testimonials Advertise QuickStart Guide StreetAuthority is Hiring News & Commentary Investment Ideas News & Analysis Most Popular Browse by Expert Carla Pasternak Nathan Slaughter Amy Calistri Andy Obermueller Paul Tracy David Sterman See All Experts Browse by Subject Income Investing Growth Investing Investing Basics Exchange-Traded Funds (ETFs) International Investing Value Investing Active Trading Energy & Commodities Get Our iPhone App Newsletters Premium Newsletters Daily Paycheck Exploration & Paydirt Game-Changing Stocks Fast-Track Millionaire High-Yield Investing High-Yield International Defense contractors will feel the pain If legislators fail to hammer out more agreements on when and where to cut, then automatic cuts will begin. For example, the Department of Defense is scrambling to adapt to the possibility that a cumulative $492 billion in spending cuts will take place through 2021. Lawmakers may decide to instill less draconian cost-cutting, but it's increasingly clear that defense contractors will probably be chasing a smaller pie of revenue.

These defense contractors have been scrambling to line up foreign customers, but have only made moderate headway: Raytheon (NYSE: RTN), SAIC (NYSE: SAI), Northrup Grumman (NYSE: NOC), Lockheed Martin (NYSE: LMT) and L-3 Communications (NYSE: LLL) all derive more than 80% of their revenue from Uncle Sam.

Meanwhile, investors have poured back into defense stocks, figuring they are inexpensive based on 2012 sales and profit forecasts. But with zero or even negative growth prospects, they aren't a bargain at any price.

As of now, the Department of Defense looks set to shrink 3% to 4% in each of the next five years. This doesn't even include spending drops associated with the U.S. troop withdrawal from Afghanistan. Whether these cuts are more focused on personnel or equipment remains to be seen, but the leading defense contractors are vulnerable because they are counting on expensive plane and ship programs that may get the budget ax.

Health care spending will plunge It's not just defense stocks that will feel the pain of reduced government spending. As of now, Uncle Sam will make an equivalent $492 billion in cuts in other parts of government as well. Again, lawmakers may manage to come to an agreement, averting these massive cuts, but investors should expect at least some degree of spending cuts.

At least 40% of the currently planned $984 billion of cumulative spending cuts through 2021 will be borne by the health care industry. Regardless of how the Supreme Court rules on the issue of President Obama's health care plan, spending cuts are coming.

A decade of rising costs has been great for drug companies, insurers, hospital operators, software supplier and many other players in the industry. The coming decade should represent a reversal of fortune for them as pricey drugs, six-figure surgical procedures, diagnostic testing services and extended patient stays within facilities are just some of the areas slated for cutting.

Companies at risk: Insurer Humana (NYSE: HUM) derives roughly 75% of revenue from Medicare and Medicaid reimbursement; Dialysis services firm DaVita (NYSE: DVA) gets 66% of revenue from the government, while this figure stands between 40% and 50% for Tenet Healthcare (NYSE: THC) and United Healthcare (NYSE: UNH).

And there's more... The for-profit education sector is hugely vulnerable in light of the growing debate of whether these institutions are delivering a sufficiently robust education for the tuition they charge. Some lawmakers hope to see reduced government support for student loans, which would lead to drops in enrollment for these institutions. DeVry (NYSE: NYSE: DV), for example, has 80% of its revenue base tied to government-sponsored student loans. This figure is more than 30% for the Washington Post (NYSE: WPO), which runs the Kaplan Education services division.

Lastly, companies that sell products to government research labs are quite vulnerable to a spending drop as well. These include Life Technologies (Nasdaq: LIFE), Thermo-Fisher (NYSE: TMO) and Sigma Aldrich (Nasdaq: SIAL).

Risks to Consider: As an upside risk, government cuts won't be nearly as severe if lawmakers instead decide to largely focus on tax increases to close the budget gap, which looks awfully unlikely.

Action to Take --> Many of these companies lack visibility into the long-term ramifications of a smaller government, and instead are relaying what business conditions look like right now. Investors would be wise to exit any government-focused stocks before the topic becomes more widely discussed in investment circles and share prices plunge.

-- David Sterman

GA_googleFillSlot("680x120_WebArticle_P.S._Text_Ad"); The Right Stocks for Today's Market

By one key measure, this handful of stocks will stand their ground if the market hits a speed bump.

3 High-Yield Stocks for the Coming Wave of Retirees

These stocks will benefit from an aging population that is demanding more medical services. Best of all, they pay steadily rising dividends and already yield as high as 7%.

Insiders are Spending MILLIONS on These 4 Small-Cap Stocks

What do they know that you don't? Here's how these insiders could make a fortune on these game-changing stocks.

3 Stocks That Can Help Cut the Pentagon's $20 Billion Energy Bill

A range of companies hopes to profit when this lumbering giant goes on a diet. Here are three stocks that could lead the way...

Do You Own One of the Most Expensive Stocks on the Market?

It's time to reevaluate these "trendy" stocks. Here is a list of stocks that you should consider selling.

Post Your Comments...View Our Comments Policy Facebook Comments:Cached on May 4, 2012, 7:41 am document.getElementById('fb_comments_for_streetauthority').style.display = 'none'; David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article. Market Summary

GS_googleAddAdSenseService("ca-pub-8569527957233114"); GS_googleEnableAllServices(); GA_googleAddSlot("ca-pub-8569527957233114", "SA_300X250_SponsorBlock"); GA_googleFetchAds(); GA_googleFillSlot("SA_300X250_SponsorBlock"); Free Newsletters function clearText(field){ if (field.defaultValue == field.value) field.value = ''; else if (field.value == '') field.value = field.defaultValue; } function validateEmail(Email) { //Validating the email field var re = /^(([^()[\]\\.,;:\s@\"]+(\.[^()[\]\\.,;:\s@\"]+)*)|(\".+\"))@((\[[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\])|(([a-zA-Z\-0-9]+\.)+[a-zA-Z]{2,}))$/ if (! Email.value.match(re)) { alert("Please provide a valid email address"); return (false); } return(true); } function formIUSubmit() { if (validateEmail(document.getElementById('rEmailIdIU'))) { document.getElementById('formIU').submit(); } } function clearText(field){ if (field.defaultValue == field.value) field.value = ''; else if (field.value == '') field.value = field.defaultValue; } function validateEmail(Email) { //Validating the email field var re = /^(([^()[\]\\.,;:\s@\"]+(\.[^()[\]\\.,;:\s@\"]+)*)|(\".+\"))@((\[[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\])|(([a-zA-Z\-0-9]+\.)+[a-zA-Z]{2,}))$/ if (! Email.value.match(re)) { alert("Please provide a valid email address"); return (false); } return(true); } function sadailySubmit() { if (validateEmail(document.getElementById('Email'))) { document.getElementById('sadaily').submit(); } } function clearText(field){ if (field.defaultValue == field.value) field.value = ''; else if (field.value == '') field.value = field.defaultValue; } function validateEmail(Email) { //Validating the email field var re = /^(([^()[\]\\.,;:\s@\"]+(\.[^()[\]\\.,;:\s@\"]+)*)|(\".+\"))@((\[[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\])|(([a-zA-Z\-0-9]+\.)+[a-zA-Z]{2,}))$/ if (! Email.value.match(re)) { alert("Please provide a valid email address"); return (false); } return(true); } function form100kSubmit() { if (validateEmail(document.getElementById('rEmailId100k'))) { document.getElementById('form100k').submit(); } } function clearText(field){ if (field.defaultValue == field.value) field.value = ''; else if (field.value == '') field.value = field.defaultValue; } function validateEmail(Email) { //Validating the email field var re = /^(([^()[\]\\.,;:\s@\"]+(\.[^()[\]\\.,;:\s@\"]+)*)|(\".+\"))@((\[[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\])|(([a-zA-Z\-0-9]+\.)+[a-zA-Z]{2,}))$/ if (! Email.value.match(re)) { alert("Please provide a valid email address"); return (false); } return(true); } function form4Submit() { if (validateEmail(document.getElementById('rEmailId4'))) { document.getElementById('form4').submit(); } } function clearText(field){ if (field.defaultValue == field.value) field.value = ''; else if (field.value == '') field.value = field.defaultValue; } function validateEmail(Email) { //Validating the email field var re = /^(([^()[\]\\.,;:\s@\"]+(\.[^()[\]\\.,;:\s@\"]+)*)|(\".+\"))@((\[[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\.[0-9]{1,3}\])|(([a-zA-Z\-0-9]+\.)+[a-zA-Z]{2,}))$/ if (! Email.value.match(re)) { alert("Please provide a valid email address"); return (false); } return(true); } function formDOSubmit() { if (validateEmail(document.getElementById('rEmailId'))) { document.getElementById('formDO').submit(); } } Latest Headlines Now is the Time to Invest in Natural GasThe Real Growth is Happening Abroad... Here's How to Get Your Piece of the ActionIf you Own These Stocks, Then Get Out NOW[+]View More

Featured Experts Forget Coca-Cola: Buy This Stock Instead by Andy Obermueller How to Earn 26.5% on $20,000 by Amy Calistri 5 Things Every Income Investor Needs to Know Now by Carla Pasternak [+]View More GA_googleFillSlot("Aflac_300x250_SA_Iframe"); #block-block-10{height:0px;display:none} GA_googleFillSlot("SA_728x90_Bottom_Ad"); Quick Links Subscribe News & Commentary Free Financial Offers Customer Service My Account Help/FAQ Lost Password/User ID Contact Us About StreetAuthority About Us Meet the Experts Newsletters Advertise Testimonials Job Opportunities Legal Terms of Use Privacy Policy Disclaimer StreetAuthority.com Courses Stocks Subscribe Income Investing Growth Investing Investing Basics Exchange-Traded Funds International Investing Value Investing Active Trading Energy & Commodities Newsletters Premium High-Yield Investing High-Yield International Daily Paycheck Market Advisor Stock of the Month StreetAuthority Insider Fast-Track Millionaire Game-Changing Stocks Scarcity & Real Wealth Top 10 Stocks Free Investor Update Dividend Opportunities Trade of the Week StreetAuthority Daily Articles RSS Feed

DISCLAIMER: StreetAuthority, LLC is a publisher of financial news and opinions and NOT a securities broker/dealer or an investment advisor. You are responsible for your own investment decisions. All information contained in our newsletters or on our website(s) should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision. As a condition to accessing StreetAuthority materials and websites, you agree to our Terms and Conditions of Use, available here, including without limitation all disclaimers of warranties and limitations on liability contained therein. Owners, employees and writers may hold positions in the securities that are discussed in our newsletters or on our website.

Copyright 2001 - 2012. StreetAuthority, LLC All Rights Reserved. Created by: Digital Kozak function bookmark_page() { var title = document.title; var url = document.location; //protocol +'//'+ document.location.hostname+'/'; if(window.chrome){ alert('Press CTRL+D to bookmark this site after you click Ok'); } else if (window.sidebar) { // Mozilla Firefox Bookmark window.sidebar.addPanel(title, url, ""); } else if ( window.external ) { // IE Favorite window.external.AddFavorite(url, title); } else if(window.opera && window.print) { // Opera Hotlist alert('Press CTRL+D to bookmark this site after you click Ok'); } } function bookmark_site() { var title = "Streetauthority"; var url = document.location.protocol +'//'+ document.location.hostname+'/'; if(window.chrome){ alert('Press CTRL+D to bookmark after you click Ok'); } else if (window.sidebar) { // Mozilla Firefox Bookmark window.sidebar.addPanel(title, url, ""); //alert('Push CTRL+D to bookmark this page'); } else if ( window.external ) { // IE Favorite window.external.AddFavorite(url, title); } else if(window.opera && window.print) { // Opera Hotlist alert('Press CTRL+D to bookmark this site after you click Ok'); } } // ----------------------------------------------------------------------------- // Globals // Major version of Flash required var requiredMajorVersion = 9; // Minor version of Flash required var requiredMinorVersion = 0; // Minor revision of Flash required var requiredRevision = 0; // Google Globals var googleSearchIframeName = "cse-search-results"; var googleSearchFormName = "ia-core-search-form"; var googleSearchFrameWidth = 960; var googleSearchFrameborder = 0; var googleSearchDomain = "www.google.com"; var googleSearchPath = "/cse"; // ----------------------------------------------------------------------------- var _qevents = _qevents || [];(function() {var elem = document.createElement('script');elem.src = (document.location.protocol == "https:" ? "https://secure" : "http://edge") + ".quantserve.com/quant.js";elem.async = true;elem.type = "text/javascript";var scpt = document.getElementsByTagName('script')[0];scpt.parentNode.insertBefore(elem, scpt);})();_qevents.push({qacct:"p-71y-GhL8dAI32"});