One sector that absolutely blew higher after the election was the defense and aerospace stocks, and with good reason. Donald Trump made a point, and he made it often during the campaign, that we would be rebuilding our military. While the run was good for shareholders, many on Wall Street are starting to take a more cautious view on the sector in 2017.

A recent Jefferies report from makes it clear that the firm too is in the cautious camp. While the analysts think defense budgets can grow at a 3% compounded annual growth rate over the next few years, there could be margin pressure, and also what they define as “Risk by Tweet” as the new president is fond of using Twitter as a forum to target business at times.

With business jet deliveries down double-digits last year, and production cuts on some of the big airliner orders, the cautious stance at Jefferies is warranted. They have four top picks for 2017, and of course, all are rated Buy.

Boeing

This top aerospace industrial has been on a roll since the election and may be ready to breakthrough to multiyear highs. Boeing Co. (NYSE: BA), together with its subsidiaries, designs, develops, manufactures, sells, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services worldwide.

The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital.

Recent reports indicate that the U.S. Navy plans to divest its older model F/A-18 Hornet fighter jets in coming years and hopes to buy dozens of F/A-18E/F Super Hornets to deal with a shortfall of strike fighters aboard its carriers. If implemented, the plan would provide dozens of new orders for Boeing and keep its St. Louis production line running for several more years.

The Jefferies team also sees big value in the stock and said in a research note late last year when the stock was trading right where it is now:

Boeing’s 30% dividend hike was 2 times what we had expected, although shares have declined since the announcement. The dividend yield is now ~1% higher than the average DJI yield and given that Boeing’s recent yield has been in the 3% range, we see significant upside to shares. Looking at core earnings and adding back 787 amortization, shares trade at just 13 times our 2017 estimates, in line with stable growers, while cyclical shares are carrying multiples above 20 times earnings.

The analysts noted this in the new report:

Boeing should be able to launch a 737MAX-10X before year end to customers that want a complement to their MAX fleet. The plane should probably require modest development spending and should be ready by 2020. Longer term, we expect Boeing’s effort to define the production system necessary to produce its next family of mid-market planes to become clearer somewhere between 2018 and 2019.

Boeing investors receive a 3.6% dividend. The Jefferies price objective for the stock is $185, the consensus target is $159.30. Shares closed Tuesday at $157.67.

General Dynamics

This company, like other major defense prime contractors, had a very solid year in 2016 and remains one the best ideas at Jefferies in the sector. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.

Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.

The analysts commented in their research:

We believe there may have been a modest Trump effect as deals at year-end may have closed faster than market participants expected. We believe the company is the low cost producer of large business jets and should be able to capture above average profitability, despite the difficult market conditions.

Investors are paid a 1.73% dividend. Jefferies has a $200 price target, while the consensus estimate is $192.61. The stock closed yesterday at $175.97.

Textron

Jefferies team views this as a true growth stock to own for 2017. Textron Inc. (NYSE: TXT) is a multi-industrial conglomerate with the following operating segments:

1. Textron Aviation manufactures light-to-medium-sized aircraft.
2. Bell comprises Bell Helicopter and Textron Systems.
3. Industrial Products manufactures machinery and equipment for golf/turf, wire and cable installation systems, plastic fuel tanks (Kautex), pumps, gears and gearboxes.
4. Textron Financial is a commercial lending operation that primarily provides equipment financing.

The analysts point out the company has a very solid new product pipeline, and they feel the company is demonstrating that new products are the superior solution to combating tough end markets. The company’s new product pipeline includes the Scorpion, Longitude, Denali, Hemisphere, V-280 and V-247.

Textron investors receive a 0.16% dividend. The $64 Jefferies price target is well above the consensus target of $52.33. The stock closed Tuesday at $48.75.

Digital Globe

This is a top small cap stock pick in the sector at Jefferies for 2017. DigitalGlobe Inc. (NYSE: DGI) provides earth-imagery products and services sourced from its own satellite constellation and third-party providers in the United States and internationally. The company offers customer-ready imagery products that are designed to enable customers to understand and analyze specific geographies of interest; analytic solutions to derive insights from imagery; online and off-line distribution options that are designed to enable customers to access and integrate its imagery into their business operations and applications.

The company’s Direct Access Program enables customers to directly task and receive imagery from its satellites within local and regional geographic boundaries of interest, as well as platform products, such as Geospatial Big Data and Spatial on Demand platforms for assembling content and large-scale analytical tools in a single environment. Its products and services support users in various fields, including defense and intelligence, civil agencies, mapping and analysis, environmental monitoring, oil and gas exploration, infrastructure management, internet portals and navigation technology.

The analyst thinks a recent acquisition is very positive:

We believe the acquisition of Radiant is a transformational deal extending the company’s lead in the commercial imagery value chain. We figure Radiant could add about $100 million to 2017 sales, while EBITDA margins could be in the 10% range. Radiant offers DigitalGlobe the opportunity to expand past geospatial images and brings credibility and capability to pursue additional analytical business.

The Jefferies price target is $44. The consensus target is $35.44, and shares closed at $29.00.

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Selective stock picking makes sense not only because the sector has run, but also because the market is very overbought at current levels. Investors may want to buy partial positions here and see how earnings play out.

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