Looking at the stock market at the moment is like gazing into the Red Sea when the algae for which it got its name is in bloom. The bear market has taken hold and volatility is no longer your friend.
At the same time, geopolitical tensions are rising. The Russian invasion of Ukraine is ongoing with no end in sight, tensions continue to mount between the U.S. and China, and North Korea can’t seem to flex its military might enough.
So where can you make money investing in times like these?
Best Defense Stocks
Defense… that’s where!
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The Biden Administration is sitting on record-high defense spending, and more increases could come down the line. The vast majority of that spending is going to publicly traded defense contractors, meaning you can easily gain exposure to increasing revenue and profitability.
With the U.S. government increasing spending, defense companies are likely to experience a sizable increase in revenue and profitability. But that doesn’t mean you should blindly invest your money in any defense name you come across.
As is always the case, educated investment decisions tend to be the best ones. Our top defense stock picks all have the potential to yield above-average market returns. They also just so happen to be the top five holdings among defense-centric exchange-traded funds (ETFs).
1. Lockheed Martin Corporation (NYSE: LMT)
Best for dividend investors.
- Performance: LMT shares have climbed more than 19% year-to-date (YTD) and more than 10% over the last year.
- Dividend Yield: 2.65%
- Valuation Metrics: Price-to-earnings ratio (P/E ratio): About 19; price-to-book value ratio (P/B ratio): About 11.5; price-to-sales ratio (P/S ratio): About 1.75.
- Market Cap: About $112.3 billion.
You can’t create a list of the best stocks in the defense industry without mentioning Lockheed Martin (LMT). The company’s products are staples for the U.S. military and our allies.
LMT is also a well-known dividend payer with one of the highest yields across the defense industry. The company has increased its dividend for the past 20 consecutive years. Should this trend continue for five more years, the ticker will join an elite group of dividend stocks known as the dividend aristocrats. Moreover, investors have enjoyed a consistent history of buybacks – yet another way the company returns value to investors.
Dividends aren’t the only reason to be excited about an investment in Lockheed Martin.
The company is a leader in military aerospace technologies, including hypersonic defense and weapons systems. It’s also the company behind the F-35 fighter jet, a single product that contributes about 30% to the company’s overall revenue.
Lockheed Martin is a major player in nearly every area of the U.S. defense ecosystem. If there’s an increase in defense spending, you can bet the company’s taking part. Not to mention that the contracts the company wins are exceptionally large, and getting larger — Lockheed Martin won the largest defense contract in its history in 2019.
2. Raytheon Technologies Corp (NYSE: RTX)
Best for supporting Ukraine’s defense with your investments.
- Performance: The stock has climbed about 8% YTD and 10% over the last year.
- Dividend Yield: 2.33%
- Valuation Metrics: P/E ratio: About 17; P/B ratio: About 2; P/S ratio: About 2.
- Market Cap: $139.7 billion.
Raytheon Technologies is another staple brand that’s become integral to the growth of the United States’ defense capabilities. Like Lockheed Martin, the company’s products can be found in just about every facet of the U.S. defense ecosystem.
On the other hand, Raytheon Technologies became a trending topic among defense sector buffs as Russia took center stage. The company sells a shoulder-fired anti-aircraft stinger missile that took center stage when the U.S. gave a large portion of its stockpile of these missiles to Ukraine and European allies to defend against the Russian invasion.
That’s a huge win for Raytheon Technologies.
After all, since the U.S. gave a large portion of its shoulder-fired stinger supply to its allies, our supply is short. So, Raytheon was recently awarded a $625 million contract to replenish the supply of these important defense tools.
If that doesn’t sound like much for a company with a nearly $140 billion market valuation, you’re right, but it’s just the beginning.
As the conflict between Russia and Ukraine continues, more replenishments are going to be required. Moreover, the U.S. and its allies are all working to bolster their defensive might as the geopolitical condition continues to fade.
Raytheon also puts a bit of icing on the cake with its commercial aerospace industry – an industry where recent earnings reports from companies like Delta Airlines suggest growth is imminent.
All told, Raytheon is an integral part of the U.S. defense ecosystem. It’s also a crucial player in the commercial airline industry and a dividend aristocrat with a strong history of increasing dividends on an annual basis. It’s hard to find reasons not to invest in the stock.
3. General Dynamics Corporation (NYSE: GD)
Best for following NATO dollars.
- Performance: GD shares have climbed over 6% YTD and over 17% in the last year.
- Dividend Yield: 2.28%
- Valuation Metrics: P/E ratio: About 19; P/B ratio: About 3.3; P/S ratio: About 1.6
- Market Cap: $61.3 billion.
General Dynamics is an integrated defense contractor that offers a diverse portfolio of products and services to the U.S. military, but that’s not why the company made our list. General Dynamics is a preferred provider for NATO, and given the current geopolitical outlook, NATO spending on defense systems is likely to balloon ahead.
General Dynamics has already become a beneficiary of NATO’s increased defense spending.
The company won the contract to run NATO’s information technology and cloud systems. Moreover, it has received orders for hundreds of tactical transportation units, units that are sure to add some growth to the company’s top and bottom-line metrics.
Moreover, it’s important not to forget that NATO isn’t the company’s only defense customer. The company has a strong history of serving U.S. and allied armed forces. In June alone, the company snagged a $130+ million contract for bomb components from the United States Army.
In fact, General Dynamics has a relationship with the U.S. government that has withstood the test of time. The relationship started in the 1950s and is still going strong today.
As with other major defense contractors, General Dynamics is also known for paying compelling dividends. The company stock trades with an impressive 2.28% dividend yield and has paid increasing dividends to investors for the past 30 years.
When you talk about GD stock, you’re talking about a company that has been serving the U.S. military and its allies for more than seven decades, one that’s paid increasing dividends as a result of its service to the defense industry for the past three decades, and one that has countless opportunities ahead as a leading defense provider to NATO. What else could you look for in a defense stock?
4. Northrop Grumman Corporation (NYSE: NOC)
Best for investing in the cosmos.
- Performance: NOC has climbed more than 24% YTD and about 30% over the last year.
- Dividend Yield: 1.44%
- Valuation Metrics: P/E ratio: About 19.3; P/B ratio: About 5.7; P/S ratio: About 2.
- Market Cap: About $74.5 billion.
Northrop Grumman is another major defense contractor with its brand found in nearly every corner of the U.S. defense ecosystem. The company sells military missiles, aeronautics, and defense systems, much like Lockheed, Raytheon, and General Dynamics.
Of course, that’s part of why it’s on the list, but it’s not the entire story.
Northrop Grumman actually experienced a decrease in sales in all three of its core defense-centric arms of business in the most recent quarter. That may be shocking, especially considering the more than 24% gains the stock has experienced this year, but it’s the truth.
So, why are investors so excited about NOC stock?
The company is making a shift into the space travel industry. NOC sees opportunity in NASA’s growing budget and efforts by companies like SpaceX and Virgin Galactic to make space tourism a reality.
That move is paying off.
The company saw a 13% year-over-year sales increase in its space business, with space sector revenues ballooning to nearly $3 billion. Investors are excited about the company’s future prospects in the cosmos, and rightfully so.
With that in mind, when you invest in Northrop Grumman, you’re investing in a stock that provides stability through its defense sector dealings and has growth stock appeal thanks to its work in space travel.
5. Boeing Co (NYSE: BA)
Best for the commercial aerospace industry bounce back.
- Performance: Boeing has lost more than 32% of its value YTD and more than 40% over the past year.
- Dividend Yield: 0%
- Valuation Metrics: P/E ratio: 0 (currently operating at a loss); P/B ratio: About 1.3; P/S ratio: About 1.3.
- Market Cap: About $82.8 billion.
Boeing might be the last company you’d expect to find on a list of defense contractors to invest in. Most people know the company as the manufacturer of commercial airplanes used by companies like Delta and Southwest Airlines, and that is a major part of the company’s business model.
On the other hand, it’s also a defense contractor, a fact that’s helped it crawl its way through the COVID-19 pandemic.
Though Boeing isn’t as deeply ingrained in the defense sector as companies like Lockheed Martin and Raytheon Technologies, it does sell the military both manned and unmanned aircraft. The company also manufactures and sells military-grade missiles.
You might be thinking, “OK, the company is a defense contractor, but it’s also struggling. Why does it deserve to be on this list?”
You’re right, Boeing has been through the wringer recently. The pandemic grounded flights around the world, and demand for commercial aircraft has plummeted. At the same time, numerous crashes in recent years have led to investigations of multiple jet models that the company develops.
That’s not good for business either.
But Boeing has seen these kinds of problems before and always seems to work its way through them. Not to mention, the company has a contract backlog consisting of nearly 3,400 737s, more than 400 787s, and more than 200 777X aircraft. That works out to about 4,000 aircraft orders to give Boeing a runway as it works through the hard times.
At the same time, the commercial aviation industry is expected to make a significant rebound as more and more consumers feel more comfortable taking to the skies again.
The bottom line is that Boeing is a risky play given recent news about the company. However, the risk seems to already have been priced into the stock. Boeing shares are down over 40% over the last year, pushing it into value stock territory.
Combine this undervaluation with stability from the defense sector and an expected boom in commercial aerospace spending, and Boeing begins to look more and more like a great defense stock pick for the risk-tolerant investor.
Other Sector Stocks
Defense stocks are a great pick for the right investor, but they may not fit your unique goals and investment style. If not, consider reading some of our other best stock articles:
Final Word
It’s important to keep your cool as the market declines and Wall Street panics. Even in bear markets, there are compelling opportunities to take advantage of.
Defense stocks are one of those opportunities.
With the defense budget climbing and no end to geopolitical concerns in sight, the stocks mentioned above should be centered in your figurative crosshairs. If you’re not interested in building your own portfolio of individual stocks, consider investing in defense ETFs to gain exposure to the sector.
No matter which route you take, make sure to do your research. As mentioned at the beginning of this article, educated investment decisions tend to be the most profitable.