Defense stocks’ fortunes are closely related to factors such as government defense spending, geopolitical risks and conflicts, and new technological advancements in warfare. Therefore, it comes as little surprise that increased levels of military expenditure, Russia’s invasion of Ukraine, and ongoing tensions in the South China Sea generally bode well for defense stocks.
Investors can track the sector through the iShares U.S. Aerospace & Defense ETF (ITA), which measures the performance of the aerospace and defense sector. The fund holds leading defense names, such as military jet and satellite maker Boeing Co. (BA), defense equipment company RTX Corp. (RTX), and sector heavyweight Lockheed Martin Corp. (LMT). Performance-wise, ITA has returned 12.25% over the past 12 months, close to the large-capitalization Russell 1000 Index’s 12.91% gain over the same period.
Below, we outline top defense stocks with the best value, the fastest growth, and the most momentum. All figures are as of late August 2023.
Best Value Defense Stocks
The defense stocks presented in the table below have the lowest 12-month trailing price-to-earnings (P/E) ratio. This metric measures a company’s stock price relative to its earnings. Typically, a low P/E ratio indicates a stock may be undervalued, while a high ratio implies that a stock has growth opportunities. Investors can use this metric to assess valuation, earnings potential, and compare stock performance within the defense sector.
|Best Value Defense Stocks|
|Price ($)||Market Capitalization (Market Cap) ($B)||12-Month Trailing P/E Ratio|
|Triumph Group Inc. (TGI)||8.01||0.6||6.8|
|Leonardo DRS Inc. (DRS)||16.9||4.4||7.1|
|Bombardier Inc (BBD.B.TO)||CA$54.6||CA$5.2||7.8|
- Triumph Group Inc.: It designs, engineers, manufactures, repairs, overhauls, and distributes aerostructures, aircraft components, accessories, subassemblies, and systems. Triumph’s customers include original equipment manufacturers of commercial, regional, and military aircraft. In June, the company announced Boeing awarded it a multiyear contract on an environmental cooling system for AH-64 Apache helicopter crew stations.
- Leonardo DRS Inc.: It provides defense electronic products, systems, and military support service through two business divisions—advanced Sensing and Computing (ASC) and Integrated Mission Systems (IMS). Customers use Leonardo’s technology for precision targeting, signal intelligence, and mission planning. The company unveiled in June a new electro-optical stabilized gimbal for small to medium unmanned aircraft systems, light fixed-wing aircraft, and helicopters.
- Bombardier Inc.: The company manufactures and sells business aircraft and aircraft structural components in Europe, North America, and Asia-Pacific. Bombardier’s customers include multinational corporations, charter and fractional-ownership providers, governments, and private individuals. Management reported an 8% jump in second-quarter year-over-year (YOY) sales, due to 19% revenue growth in its aftermarket servicing business.
Fastest-Growing Defense Stocks
The table below presents the top three defense stocks ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly YOY percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth.
Comparing both of these metrics provides investors with a more comprehensive indication of a company’s growth prospects and helps to avoid financial reporting abnormalities, such as restructuring costs and one-off asset sales.
|Fastest-Growing Defense Stocks|
|Price ($)||Market Cap ($B)||EPS Growth (%)||Revenue Growth (%)|
|CAE Inc. (CAE)||23.2||7.4||18||7|
|Virgin Galactic Holdings Inc. (SPCE)||2.9||1.1||N/A||424|
|EHang Holdings Ltd. (EH)||20.5||1.2||N/A||256|
- CAE Inc.: The company provides simulation training and critical operations support products globally. It is structured in three segments: Civil Aviation, Defense and Security, and Healthcare. CAE’s Defense and Security segment booked orders for $237.7 million and an additional $779.0 million of unfunded contracts in its latest quarter, which included a 12-year $455.0 million contract to support entry-level and graduate-level flight training and a U.S. Air Force flight training contract valued at $110.6 million.
- Virgin Galactic Holdings Inc.: It develops, manufactures, and operates spaceships and related technologies for conducting human commercial spaceflight. The company also conducts ground and flight testing, and post-flight maintenance of its spaceflight system vehicles. Virgin Galactic’s key customers include private individuals, researchers, and government agencies. In August, the company announced it had completed its first private astronaut flight, “Galactic 02.”
- EHang Holdings Ltd.: It operates globally as an autonomous aerial vehicle (AAV) technology platform company. Its AVVs are being developed and used for passenger transportation, logistics, smart city management, and aerial media products. The company recently announced that its EHang unmanned aircraft cloud system has been officially approved by China’s Civil Aviation Administration, paving the way to commercial operations for the company.
Defense Stocks with the Most Momentum
The defense stocks presented in the table below have delivered the highest total return over the last 12 months. Momentum investors believe stocks that are outperforming their sector peers with likely continue to do so in the future.
|Defense Stocks with the Most Momentum|
|Price ($)||Market Cap ($B)||12-Month Trailing Total Return (%)|
|EHang Holdings (EH)||20.5||1.2||163.9|
|Rolls-Royce Holdings PLC (RYCEY)||2.6||21.7||141.1|
|Russell 1000 Index||N/A||N/A||12.91|
|iShares U.S. Aerospace & Defense ETF (ITA)||N/A||N/A||12.25|
- EHang Holdings: See company description above.
- Rolls-Royce Holdings PLC: It operates as a global industrial technology company. It manufactures engines for aviation, including commercial aircraft and military applications, as well as propulsion systems for ships and submarines. Earlier in the year, Rolls-Royce announced that its submarines business will provide reactors for Australia’s nuclear-powered submarines as part as part of the AUKUS trilateral agreement between Australia, the U.K., and the U.S.
- Bombardier: See company description above.
Advantages of Defense Stocks
Stability and resilience in uncertain times: Defense stocks often display stability and resilience during economic uncertainties and market downturns. Governments worldwide continue to allocate significant budgets for defense spending to ensure national security. For instance, the Biden administration has requested a Fiscal Year (FY) 2024 defense budget of $842 billion, up $26 billion from FY 2023 levels. The consistent demand for defense products and services provides a steady revenue stream for defense companies. As a result, defense stocks tend to demonstrate less sensitivity to economic cycles than other industries. Investors seeking a safe haven during market turbulence may find defense stocks appealing due to their potential to maintain value even in challenging times.
Long-term contracts and predictable cash flow: Many defense companies secure long-term contracts with governments and other businesses. For example, the U.S. Army awarded aerospace and defense giant Lockheed Martin a $4.8 billion guided-rockets contract in April amid increased demand from the government supplying these weapons to Ukraine. These contracts often span several years and provide a predictable cash flow. This stability allows defense companies to plan and invest for the future. Investors benefit from this predictability, as it reduces the uncertainty associated with fluctuating revenue. Additionally, defense contracts can lead to consistent dividends and share buybacks, enhancing the total return for investors. This reliable income stream makes defense stocks attractive to those seeking steady income and long-term growth potential.
Limitations of Defense Stocks
Political and budgetary uncertainties: Defense stocks remain subject to political and budgetary shifts. Defense spending heavily depends on government budgets, which may fluctuate due to changing administrations, geopolitical factors, or economic conditions. Despite the U.S. spending more on defense than many other countries combined, the Congressional Budget Office (CBO) projects that defense spending as a share of gross domestic product (GDP) will decline over the next decade to 2.8% in 2033 from 3.1% of GDP in 2023. Budget cuts or changes in defense priorities can lead to reduced contracts and revenue for defense companies. Such uncertainties can create volatility in defense-stock prices, making them sensitive to political decisions and potentially affecting investor returns.
Ethical and reputational concerns: Investing in defense stocks may raise ethical dilemmas for some investors. The defense industry is associated with the manufacturing of weapons and technologies used for military purposes, including potential civilian harm during conflicts. This association might conflict with certain investors’ values and social responsibility considerations. Engaging in defense investments can lead to reputational risks, as some individuals or groups might view such investments negatively, potentially affecting the public perception of both the investor and the defense company itself.
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As of the date this article was written, the author does not own any of the above stocks or ETFs.