SA Roundtable: Should You Buy Defense Stocks? Which Ones?

Defense Spending and the Current Investment Climate

With increased defense spending in the United States and the European Union, many investors are wondering whether now is a good time to invest in defense stocks. A recent survey of readers on Seeking Alpha revealed that 51.4% of the 979 participants believed it was the right time to buy, while 48.6% disagreed. To gain more insight, we reached out to several analysts to share their perspectives on the current state of the defense sector and which stocks might be worth considering.

Analyst Perspectives on the Defense Sector

Eliana Scialabba highlighted that the international context is pushing governments to increase defense budgets, leading to sustained demand for technology and services. While companies like Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), and General Dynamics (NYSE: GD) have valuations slightly above historical averages, their long-term contracts and growing backlogs make them attractive options. She also noted improved confidence in RTX (NYSE: RTX) due to its operational progress and margin recovery, suggesting the sector still offers opportunities for those seeking defensive exposure.

Hawkinvest, on the other hand, advised caution in the short term, noting that the defense sector is overbought and extended above key moving averages. He suggested waiting for pullbacks before making investments, though he acknowledged that some stocks, like RTX and Boeing (NYSE: BA), had already seen significant gains. Hawkinvest also pointed to potential buying opportunities in Lockheed Martin and Textron (NYSE: TXT) if they experience further declines.

Leo Nelissen took a balanced view, acknowledging the secular uptrend in the defense sector driven by depleted missile stockpiles and underinvestment in defense equipment. However, he warned that much of the positive news has already been priced into stocks, citing Rheinmetall (OTCPK: RNMBF) as an example of a stock trading at a high multiple.

Dividend and Value Investor emphasized that the market has already priced in much of the potential upside, advising caution when investing in a broadly covered theme. They also pointed out that not all announced spending will translate into profits for defense companies due to bureaucratic challenges. Instead of ETFs, they prefer individual stocks with strong fundamentals and reasonable valuations.

Top U.S. Defense Stocks to Watch

Eliana Scialabba recommended focusing on Lockheed Martin and Northrop Grumman for their diversification and track record, while also highlighting RTX as an interesting option. She also pointed to Palantir (NASDAQ: PLTR) and AeroVironment (NASDAQ: AVAV) for their growth in AI and drone technologies.

Hawkinvest saw value in Lockheed Martin and Textron, especially if there is further weakness. He also noted that Lockheed Martin’s “Golden Dome” project presents a long-term opportunity, despite a recent $1.6 billion charge that affected its Q2 results.

Leo Nelissen highlighted L3Harris Technologies (NYSE: LHX), RTX, GE Aerospace (NYSE: GE), and Northrop Grumman as top choices due to their resilience against disruptions and exposure to fast-growing programs.

Dividend and Value Investor emphasized the balance between quality and value, recommending Lockheed Martin for its strong F-35 franchise and long-term position, despite its risks.

International Defense Stocks and Emerging Players

Eliana Scialabba pointed to BAE Systems (OTCPK: BAESY), Elbit Systems (NASDAQ: ESLT), Leonardo (OTCPK: FINMY), and Saab (OTCPK: SAABF) as strong international options. Hawkinvest suggested looking at Elbit Systems and Thales (OTCPK: THLEF) for potential purchases after a pullback.

Leo Nelissen preferred MTU Aero Engines (OTCPK: MTUAY) for its role in next-gen defense programs and partnerships with companies like RTX. Dividend and Value Investor viewed Dassault Aviation (OTCPK: DUAVF) as a solid company with a reasonably valued stock and diverse operations.

Up-and-Coming Defense Companies

Eliana Scialabba highlighted Kratos Defense (NASDAQ: KTOS), Mercury Systems (NASDAQ: MRCY), Palantir, and AeroVironment as emerging players with strong growth potential. Hawkinvest focused on drones and the Golden Dome project, suggesting Ondas Holdings (NASDAQ: ONDS) and Red Cat Holdings (NASDAQ: RCAT) as ones to watch.

Leo Nelissen pointed to Rocket Lab (NASDAQ: RKLB), Anduril, and Joby Aviation (NYSE: JOBY) for their disruptive potential. Dividend and Value Investor emphasized L3Harris as a major defense contractor in the making, noting its diverse product portfolio and potential for synergies in the Golden Dome project.

Conclusion

The defense sector remains an attractive investment opportunity for those who can navigate the current market dynamics. With increased government spending and technological advancements, several companies stand out as strong candidates for long-term growth. However, investors should remain cautious, carefully evaluate valuations, and consider both domestic and international options.