Will Military and Defense Stocks Buck the Bear?

It's hard to find pockets of safety amidst the market carnage, as investors focus on recessionary fears and rising rates. Yet, according to several advisors and contributors to MoneyShow.com, one group that may be resistant to these negative trends is military and defense stocks. Here are several ideas among individual stocks and ETFs invested in the sector. John Persinos, Personal Finance SPDR S&P Aerospace & Defense ETF is an exchange-traded fund that's considered a benchmark for the aerospace/defense industry. XAR seeks the total return performance of the S&P Aerospace & Defense Select Industry Index. The Russia-Ukraine war and rising inflation make aerospace/defense stocks particularly appealing now. During periods of geopolitical uncertainty, defense spending increases. But defense stocks also make a great hedge against inflation. One reason is the prevalence of cost-plus contracts, which allow military contractors to include higher input costs into what they eventually charge the Pentagon. If you're looking for a source of profits that enjoys multi-year momentum, the aerospace/defense sector fits the bill. Pentagon suppliers get a steady stream of contracts, courtesy of taxpayers, regardless of economic cycles, the movement of inflation and interest rates, the political party in power, or monetary policy. Federal Reserve tapering? Defense contractors shrug indifferently. XAR's holdings include mega-cap defense majors, such as Textron and General Dynamics . Textron is a global conglomerate of aircraft, defense, industrial and finance businesses. General Dynamics provides combat vehicles; information technology solutions for the military; maintenance overhaul and repair for military aircraft; submarines; and surface ships. The fund also attempts to diversify toward smaller companies with technology specialties and faster growth prospects such as Virgin Galactic , with a market cap of $2.1 billion, services the booming spaceflight and satellite sectors. Kratos Defense & Security Solutions is another small-cap stock, with a valuation of $2 billion, that's enjoying tailwinds because it's in the burgeoning field of drones. Central to Ukraine's fighting approach is precision warfare supported by unmanned aerial vehicles (UAVs), known as drones. Countries around the world are devoting big sums to producing drones. The U.S. and its allies have been providing substantial numbers of drones to Ukraine. Many of XAR's holdings enjoy entrenched ties to Pentagon brass. We face several years of booming military expenditures in the U.S. and around the world. These vast sums will end up in the coffers of XAR's portfolio holdings, in turn enriching shareholders. President Biden has consistently hiked the Pentagon's budget so far during his tenure. Rising threats posed by peer adversaries such as Russia and China are major reasons. The defense budget boosts we're seeing at home and overseas enjoy unstoppable momentum. Providing a countermeasure to superpower rivals isn't the only motivation behind U.S. defense spending increases. America's democratic allies are major customers for the firms held by XAR. These affluent nations in Europe are worried about the expansionism of autocratic Russia. Western Europe has responded to Russia's invasion of Ukraine with major planned increases in military spending. Since the end of the Cold War, Europe has neglected its defense spending, but that's about to change. Germany, for example, is on the cusp of a military shopping spree. Overall, XAR provides recession-resistant growth, an inflation hedge, and a way to benefit from geopolitical danger. Jon Markman, Strategic Advantage Finland and Sweden have officially applied to join NATO. If admitted they would join their Nordic neighbors in the alliance and open up a big new market for American defense contractors. The real winners are American defense companies. Indeed, it would be a big win for Raytheon (RTN), Lockheed Martin (LMT) and Northrop Grumman (NOC). Treaty obligations will mean a significant increase in defense spending. Finland has already ordered 64 new F-35 warplanes, the elite joint strike fighter developed by Lockheed Martin, Northrop Grumman and BAE Systems (BAESY). The JSFs cost between $110 million and $135.8 million. More importantly, aligning with NATO is a commitment to interoperability with the American defense ecosystem. This directly benefits the big U.S. contractors. The market for their goods is expanding and they will face no competition for the foreseeable future. In the short term, the revenue increase is going to be minimal. Defense contractors recognize sales when systems are delivered, and that can take several years. In the interim the sector will benefit from supplementary bills passed to aid the war effort in Ukraine. The Raytheon-made Javelin missile system has become a vital part of the Ukrainian defense effort. The heat-seeking, shoulder mounted anti-tank missiles are mostly responsible for destroying 664 Russia tanks, according to data published at Radio Free Europe. The F-35-ification of European armies might be a bigger deal, though. In addition to the cost of the units, corresponding ground support, spare parts and maintenance, there is lock-in factor. Europe is now committed to America-made gear for decades to come. American defense contractors are reliable technology partners. The companies are also backed-up by the largess of the U.S defense budget, a record $810 billion in 2021. There is no appetite politically to decrease military spending. And that sentiment is spreading globally, thanks to the carnage in Ukraine. Overall, Raytheon, Lockheed Martin and Northrop Grumman are currently the best way to play this bigger trend. At share prices of $90, $424, and $443, the stocks trade at 15.5x, 14.9x, and 16.3x forward earnings respectively. Given the prospect of new markets in Europe for the foreseeable future, these multiples seem inexpensive. Longer-term investors should consider buying shares into further weakness. Glenn Rogers, Internet Wealth Builder Raytheon Technologies is one of the largest aerospace and defense companies in the world. It has over 150,000 employees in 46 countries and has been around in various forms for over 100 years. A few years ago, it merged with United Technologies and spun off the Otis and Carrier businesses, which left it with a large dominant aerospace and defense business. The company's portfolio includes the manufacture of airplane engines, avionics, guided missiles, air defense systems, satellites, and drones. One of the company's best-known products is Stinger missiles, which are used extensively in Ukraine to great effect. In fact, Raytheon has just been awarded a US$624 million contract from the U.S. Army to produce 1,300 Stinger missiles. Hundreds of these missiles have already been shipped to Ukraine and because of their proven effectiveness many other countries will be ordering them as well. The company's name brands include Collins Aerospace, Pratt & Whitney, Raytheon Intelligence and Space, and Raytheon Missiles and Defense. So even though a large portion of the business is focused on the defense industry, it is also very active in non-defense sectors like commercial aviation and space exploration. Raytheon recently reported first-quarter 2022 results. Sales were $15.7 billion (figures in U.S. dollars), up 3% from the prior year. Organic growth was ahead 4%. Adjusted earnings per share were up 28% versus the prior year. The company generated free cash flow over of $37 million. The company repurchased $743 million worth of shares in the quarter and intends to buy back at least $2.5 billion this year. The stock pays a quarterly dividend of $0.55 a share ($2.20 a year) to yield 2.3% at the current price. The payout has been raised for three consecutive years. Raytheon reaffirmed its outlook for the rest of the year. The company projects $68 billion in sales with adjusted earnings per share of $4.80. The stock pulled back slightly during the recent downturn and is currently below its recent high of $106.02. I intend to buy some more shares myself and if you do not already have a position, I would recommend adding it to your portfolio. John Eade, Argus Research Howmet Aerospace Inc. , the former Arconic Inc., is a $15 billion market-cap company; It offers jet engine components, aerospace fastening systems, and titanium structural parts for mission-critical performance and efficiency in aerospace and defense applications The company faces challenges due to its exposure to Boeing jets (the 737 MAX and the 787) and Covid-19. But it has endured the worst of the pandemic, and the outlook is brighter. Management has reinstated guidance, resumed share buybacks, and is once again paying a modest quarterly dividend of $0.02 per share. The balance sheet is also improving as the company pays down debt. We think that Howmet has the ability to double its current earnings over the next 3-4 years. Our revised target price of $41, raised from $38, implies a valuation multiple closer to the industry average on those normalized earnings. We can look at earnings, revenues and cash flows compared to the peer group, though, and on these multiples the shares appear attractive. HWM trades at a P/E of 20-times our 2023 EPS forecast, above the average of 17 for a group of comparable Industrial companies, though we note that Howmet's sales and margins are temporarily depressed by the pandemic. On price/sales, the current ratio is below the peer group average of 2.8. We think that Howmet has the ability to double its current earnings over the next 3-4 years. Our revised target price of $41 implies a multiple closer to the industry average on those normalized earnings. Sean Brodrick, Wealth Wave Fears of a recession are rising, which scares investors a lot. But what if I told you that you can invest in an industry that's guaranteed to see spending rise in the next few years? I'm talking about the defense industry. And I have three ideas for you to consider today to ride the wild bull that's already carrying defense stocks higher. First, if you prefer exchange-traded funds, consider the iShares U.S. Aerospace & Defense ETF . It's the most liquid of the defense ETFs and has an expense ratio of 0.42%. Second, Raytheon Technologies jointly produces the Javelin missile system, which Ukraine is using against Russian invaders. Since the beginning of February, the U.S. committed to giving Ukraine 5,500 Javelin systems. Each are worth about $178,000. The Ukrainians have even turned the javelin into a symbol of national protection. Other weapons delivered or on their way from various NATO members include tanks, high-mobility multipurpose wheeled vehicles (HMMWVs or Humvees), personnel carriers, artillery, guided anti-tank and antiaircraft missiles, helicopters, drones, small arms, command-detonated Claymore antipersonnel mines and more. Heck, the U.S. and its allies are even shipping Ukraine our most advanced air-defense systems. Third, Lockheed Martin is the other joint producer of the Javelin, and produces many other weapons systems as well. Recently, the firm's CEO James Taiclet told CNBC that demand for the Javelin and other weapon systems would increase broadly over time because of the Russian invasion, and the company was ramping up to meet demand. Raytheon and Lockheed Martin both pay hefty dividends, and even more important, are dividend raisers. All three ideas are leaving the S&P 500 in the dust, though the two individual stocks are outperforming the ETF by quite a bit. That's to be expected - ETFs lower your risk, but also your potential for returns. Interestingly, all three recently experienced pullbacks and are off their highs. That sure looks like a discount to me. Always do your own research and due diligence before buying anything. But there's definitely a bull market in blowing things up.

Will Military and Defense Stocks Buck the Bear?

In times of geopolitical uncertainty, defense spending increases. But these names also make a great hedge against inflation. Here are several individual stocks and ETFs to consider.

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