Best Defense Stocks To Buy

Best Defense Stocks To Buy: Investing in the defense industry has long been regarded as a hedge against volatility in global markets. The more uncertain world conditions become, the more likely defense companies will profit.

Certainly, the defense industry has its ups and downs like any other, but the variability is typically unrelated to the economy. Instead, it depends on whether and how priorities change, both in Congress and in the President’s administration.

Regardless, the US military is reliably well-funded, and the US government has always paid its bills, so many investors consider defense stocks an important component of a well-diversified portfolio.

An Overview of the Defense Industry  

United States defense spending makes up more than 35 percent of the global total for this industry, and most of that goes to US companies. Today, the Department of Defense has a full $738 billion in its budget, and a substantial portion of that will be spent on management contracts, equipment purchases, and research and development expenses.

Just a handful of domestic defense companies meet Department of Defense contractor eligibility criteria, and it is difficult for new businesses to gain entry to this exclusive group. That means the organizations already profiting from US defense spending are likely to continue profiting, as competition is strictly limited.

Since the 2016 election, defense stocks have been doing particularly well, thanks to a dramatic increase in US military spending.

In fact, the iShares US Aerospace & Defense Exchange Traded Fund (ITA) has grown a full 70 percent since the change in administration. There is no indication that the trend will quiet, given the nation’s current tensions with Iran.

Those interested in adding defense stock to their portfolios typically begin with one or more of the following:

Northrop Grumman Financials Are Solid

With its market cap currently at $50 billion, Northrop Grumman isn’t the largest defense company. However, it is having an especially successful run, bringing in $33.8 billion in 2019.

Northrop Grumman is a subcontractor for Lockheed’s popular F-35, and it produces Global Hawk and other drones.

It will also enjoy substantial revenue from the Air Force’s planned purchase of between 80 and 100 B-21 stealth bombers, which are intended to replace aging B-52s. This project alone has been estimated at a value of up to $80 billion, and the first planes are expected to fly at the end of 2021 or beginning of 2022.

In addition to its work in the defense industry, Northrop Grumman is expanding into space territory through the 2018 acquisition of rocket maker Orbital ATK. As it dips into more business lines, some analysts think it could be a contender for leading the industry at some point in the not-too-distant future.

Granted, Northrop Grumman isn’t immune to the massive market downturn brought on by the COVID-19 pandemic, but its reduced stock prices are fully aligned with the larger decline.

The company itself is on solid ground, by every indication, it will recover and thrive. That makes Northrup Grumman a smart choice for investors looking to add defense stock to their portfolios.

Boeing Has Run Into Trouble

Boeing’s commercial division has been in the news for more than a year after two of its 737 Max jets suffered catastrophic failure, killing all passengers and crew members on board.

The entire fleet of 737 Max jets has been grounded, and there are periodic leaks of emails and documents that show the company ignored safety in favor of profit.

As a result of this on-going issue and the new threat presented by COVID-19, Boeing’s market cap has dropped from $180 billion to just $91 billion.

The issues in the commercial division aren’t Boeing’s only problem. The aerospace division is also experiencing obstacles in successful completion of critical spacecraft, including delays and mission failures. These challenges haven’t done much to support the company’s recovery from the 737 Max disaster.

The good news for investors is that the commercial division is only part of Boeing’s total business, and its defense programs continue to contribute substantial revenue, boosting total results. In fact, for 2019, total defense revenue came in at $26.2 billion – just one percent lower than its 2018 revenues.

Boeing has a variety of defense projects in the works, including fighter aircraft such as the F/A-18 and the F-15. The company is in the process of updating this fleet, and it is building the Navy’s MQ-25 Stingray aerial refueling drone, the Air Force’s KC-46 refueling tanker, and the Air Force’s T-7 Red Hawk trainer jet. It appears that these projects are proceeding without issue, which may prove to be the company’s lifeline when it comes to staying solvent.

With that said, of all available defense stocks, Boeing is probably the riskiest for investors. It is unclear whether the company can withstand another crisis, and today’s exceptionally volatile markets prove another crisis could be just around the corner.

Those willing to take a risk have an opportunity to purchase Boeing stock at prices that are more affordable than they have been in years. If you can buy and hold, you may realize substantial gains long-term.

Lockheed Martin Is The Gold Standard

Lockheed Martin is the gold standard in defense stocks. It is the largest defense contractor in the nation, and it is on the cusp of being the biggest US aerospace company.

Lockheed’s current market cap is approximately $89.6 billion, and it’s total 2019 revenue came in at $59.8 billion.

While it has suffered from the recent economic downturn, by every indication, the company is looking forward to a profitable future.

Lockheed was selected as a key contributor to the F-35 Joint Strike Fighter, which at $400 billion is the most expensive program ever launched by the Department of Defense. Perhaps more importantly, US allies are also ordering F-35s, locking in substantial long-term revenues.

Through 2035, Lockheed has been asked to deliver 3,100 in total. It appears the Pentagon’s future war strategy is centered around the F-35, putting Lockheed in an excellent position for continued growth and profit.

Raytheon Is On A Growth Trajectory

While Raytheon isn’t the biggest contributor to the defense and aerospace industries at the moment, the company is clearly striving to grow and expand. Its current market cap is $42 billion, and the company generated $29.2 billion in revenue for 2019.

However, Raytheon is working on a merger with United Technologies, which makes engines for F-35s. Once the deal has been approved by regulators, the combined company will be second only to Boeing in the defense and aerospace industries.

The merger is expected to close in the second quarter of 2020, and the combined company will go by the name Raytheon Technologies. It’s total annual revenue is expected to top $77 billion, which promises to transform the landscape of the defense industry.

Raytheon is probably best known for its missiles and missile defense systems, particularly the Tomahawk cruise missile and the Patriot missile defense system. Demand for such weapons and defense systems has increased exponentially as tensions have grown between the United States, its allies, and China, Iran, and North Korea.

While Raytheon’s missiles and missile defense systems have the most name recognition, the company’s most important work is going on behind the scenes.

Raytheon leads the industry in electronic warfare and radar systems, and it is hard at work on creating a strong cyberdefense system. All in all, Raytheon is an excellent option for investors with both short-term and long-term financial goals.

General Dynamics Is An Old Reliable

While on the smaller side with a market cap of just $40 billion, General Dynamics plays an important role in the nation’s defense. This is the company responsible for building Navy ships, and together with partners, it is currently working on the Littoral Combat Ships.

General Dynamics is parent to Electric Boat, which builds Virginia and Columbia-class submarines, and it owns Bath Iron Works, maker of Zumwalt and Arleigh Burke-class destroyers.

Other General Dynamics divisions build the Navy’s support ships, and there is a commercial division that handles orders for dry cargo ships and oil tankers.

Outside of its ship-building business, General Dynamics works on a variety of defense-related land-based vehicles. For example, this is the company responsible for Strykers, Light Armored Vehicles, and Abrams tanks.

Finally, General Dynamics has a piece of the aerospace pie through its popular Gulfstream business jets. Overall, this company’s proven ability to deliver high-quality vehicles for land, air, and sea has made it a critical component of the total defense equation.

Investors tend to trust General Dynamics for its reliability, making it a smart choice for improving diversification in your portfolio.

Best Defense Stocks: The Bottom Line

All in all, when the short-term economic outlook is uncertain, investors can typically count on defense stocks to add a bit of stability to their portfolios. The recent market changes have impacted these top defense companies to some extent, which means this is an ideal time to purchase shares at lower-than–usual prices.

When the market recovers, which historically it always has, investments in defense stocks are likely to return value sooner than their non-defense peers.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.