GD Looks Cheap, But Is It a Value Trap or Treasure?

Here is why we think GD deserves consideration as a value stock.

• Reasonable Growth: 14.1% LTM and 8.6% last 3 year average.
• Cash Generative: Nearly 6.8% free cash flow margin and 10.2% operating margin LTM.
• No Major Shocks: GD has avoided any large revenue collapses.
• Modest Valuation: Despite encouraging fundamentals, GD trades at a PE multiple of 19.7

*LTM: Last Twelve Months

That is one way to look at stocks. Trefis High Quality Portfolio evaluates much more, and is designed to reduce stock-specific risk while giving upside exposure

Does This Work?

For 65 similar value stocks chosen as of mid 2024, consider the following stats for the subsequent 1 year period.

• Average peak return of 39.3% vs 14.4% for S&P, with maximum peak return of 133%
• Win rate of 60%; win rate represents % of stocks with positive return
• Average 1-year return of 14.6%, similar to S&P’s despite tariff instability

But Consider The Risk

That said, General Dynamics isn’t immune to big sell-offs. It fell nearly 50% in the Dot-Com crash and over 60% during the Global Financial Crisis. Even the 2018 correction and Covid dip led to losses of about 35% and 44%, respectively. The recent inflation shock was milder but still caused a 19% drop. Solid fundamentals matter, but when the market turns, this stock can still take a significant hit.

The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.