Shutdown stocks to watch: These companies get a bulk of their revenues from the government

The federal government shutdown is prompting investor scrutiny of government services contractors, with TD Cowen highlighting potential risks to backlog conversion and cash flow if prolonged. While CACI International, Leidos, and Parsons are considered buffered with sufficient funding, Booz Allen Hamilton and Science Applications International face greater vulnerability due to factors like aggressive guidance and civilian agency reliance, respectively. Despite this, BAH and SAIC, having already declined 8% and 16% over the past month, are seen as having stronger recovery potential once a resolution emerges.

Analysis

A federal government shutdown is creating a clear bifurcation in the government services sector, according to analysis from TD Cowen. While a brief shutdown poses minimal fundamental risk, a protracted impasse of a month or more could materially impact backlog conversion, new contract awards, and free cash flow. Certain contractors, namely CACI International, Leidos, and Parsons, are viewed as well-insulated due to sufficient funding buffers that can mitigate near-term disruption. Parsons is noted as particularly resilient, benefiting from a sizable non-U.S. business that further shields it from the U.S. federal budget impasse. Conversely, Booz Allen Hamilton (BAH) and Science Applications International (SAIC) are identified as more vulnerable. BAH's risk stems from its aggressive fiscal 2026 guidance and a relatively low funded backlog, while SAIC's exposure is linked to its reliance on civilian agencies and the necessity of new contract wins to achieve its fiscal 2027 targets. Despite these vulnerabilities, the significant recent stock declines of 8% for BAH and over 16% for SAIC have positioned them as potential recovery plays, with analysts suggesting they have greater rebound potential once a budget resolution becomes apparent.

Key Decisions for Investors

• Investors seeking to mitigate shutdown-related risks should consider overweighting contractors with stronger funding buffers and business diversification, such as CACI, Leidos, and particularly Parsons, which is further insulated by its non-U.S. operations.
• For those with a higher risk tolerance, the notable underperformance of Booz Allen Hamilton (-8%) and SAIC (-16%) may present a tactical buying opportunity, as these stocks are cited to have the greatest recovery potential upon a resolution to the budget impasse.
• The primary variable to monitor is the shutdown's duration; a prolonged event lasting a month or more would escalate risks across the sector, potentially eroding the cash flow and backlog advantages of even the more resilient firms.