LMT, GD and RTX: value, quality and pairs trade opportunities compared

Three defense industry giants, LMT, GD, and RTX, are all flashing "Strong Sell" on daily and weekly technical indicators, despite the monthly signals indicating a different story. RTX is marked as a "Strong Buy" on the monthly, while GD is simply rated as a "Buy". This discrepancy forms the basis for a potential pairs trade opportunity.

The value of LMT is highlighted by its lowest forward multiple (18.5x), largest fair value discount (+16.7%), and highest dividend (2.4%). However, it has the lowest gross margins (10.2%) and faces challenges due to Q1 earnings misses and geopolitical uncertainties surrounding the NDAA.

GD, on the other hand, is seen as a quality compounder. It offers the best free cash flow yield (7.2%), the most stable balance sheet (D/E of 35.3%), the highest return on equity (17.8%), and the most substantial upside potential (+25.8%). Additionally, its revenue is projected to grow to $52.6 billion in FY2025, up from $38.5 billion in FY2021, representing a 36% expansion over four years.

RTX is characterized as a momentum name rather than a value one, with superior gross margins (20.3%) and the fastest growth rate (11.8%). But it trades at a slight premium to fair value (-1.7%) and a high LTM P/E of 32.6.

All three stocks are currently in a sector-wide pullback. Their daily RSI readings of 33.8 (LMT), 20.8 (GD), and 26.4 (RTX) signal oversold conditions, while their ADX readings of 47–72 confirm that the downtrend is embedded with real momentum.

The apparent divergence between the monthly and daily trends across all three stocks suggests that the sector is experiencing a short-term pullback within a longer-term uptrend. GD's ADX at 72 hints that the downtrend might be overextended, potentially setting the stage for significant mean reversions.

The NDAA uncertainty, as noted in the Q2 earnings report, is likely to be a near-term catalyst to watch. The article suggests a specific pairs trade strategy: buy LMT (for its value), invest in GD (for its quality and growth potential), and consider a long GD / short RTX position (to benefit from RTX's high valuation and LMT's undervaluation, with GD providing a buffer during market fluctuations).