Get Defensive: Top Stock Picks in Defense, From Drones to Space Systems

Geopolitical threats and rising global tensions continue to support demand for military wares to support troops on land, sea and space. Several top investment experts and contributors to MoneyShow.com offers their favorite ideas in the defense sector. Scott Chan, The Complete Investor Defense stocks offer both downside protection and potential upside. In today's environment, that should make them core holdings for all investors. Historically U.S. defense spending is recession-proof. Recent concern about an economic slowdown is one good reason to own defense stocks. An even more compelling reason is escalating global tensions, starting with our increasingly erratic and contentious relationship with China. As mutual mistrust continues to fester, the U.S. will want to make sure it maintains a military edge. And, of course, other geopolitical hotbeds like the Middle East and North Korea remain chronic concerns. In all, it's a safe bet that national defense, including cyber-defense, will remain an ultra-high priority. Our top defense pick is Northrop Grumman , which is best known for its aerospace and mission control capabilities, encompassing manned and unmanned aircraft and high-tech electronic surveillance and targeting systems. Its engineering expertise makes it costly for customers to switch to rivals and keeps Northrop one of the Pentagon's go-to contractors. The company's June 2018 acquisition of Orbital ATK, which added high-end products for the U.S. military and NASA space systems, already is paying off. Renamed Grumman Innovation Systems, the division recently won a $1.1 billion contract to test the U.S. ballistic missile defense system. Northrop also is the sole bidder for the first phase of a planned new intercontinental ballistic missile system potentially worth $60 billion. Boeing dropped out, claiming the Orbital purchase had given Northrop an unfair cost advantage. Northrop also has a contract with the Pentagon for the future sale of 100 next-generation long-range bombers (the B-21) over the next 15 years or so, a deal that could cumulatively bring in about $80 billion. For a well-positioned defense company with growing revenue, strong cash flow, and a large safety net, look no further than Northrop. David Holt, CFRA Research's The Outlook Headquartered in Arlington, VA, CACI International Inc. provides professional services and information technology (IT) solutions. The company's services are primarily targeted to the areas of defense, intelligence, homeland security and IT modernization. The company was founded in 1962 and was taken public in August 1968. Following drawdowns from Budget Control Act (BCA) caps in the past, revenues inflected higher with a ~2% rise in FY 18 (June) and ~11.6% in FY 19, on strong program performance. The budget environment remains highly accommodative, as the recently signed two-year budget provides healthy spend for customers aligned well with CACI's technological capabilities. CACI's deep backlog (~3.0x revenues at $16.9B) and submitted/expected bids for new business of $16.8B+, which is largely comprised of new business (80%), helps solidify the company's future growth profile. We see a 13% rise in FY 20 revenues, as CACI's greater focus on full-spectrum cyber and IT modernization remains a long-term catalyst, in our view. Net income and cash flow have seen healthy expansion; both were revised upward in CACI's FY 20 guidance in June. Our 12-month target of $255 is 20.7x our FY 20 EPS view, in line with federal IT peers. CACI's annualized free-cash flow yield is attractive at 6.2%. Risks to our recommendation and target price include smaller-than-expected increases to the DoD budget and a material change to the company's competitive positioning for longer-term projects. Chuck Carlson, DRIP Investor Defense-related stocks have pulled back in recent trading after posting solid gains for much of the last year. The catalyst for the latest pullback seems to be the White House decision to withdraw from Syria. Investors may be wondering if a withdrawal here could lead to withdrawals in other parts of the globe, which would not necessarily be a positive for defense-related stocks. I believe such fears are overblown, however, and see the defense sector as continuing to be well funded. Thus, the latest price pullback is providing an opportunity in quality defense stocks. One defense stock with appeal at current prices is Lockheed Martin . The company has a solid track record, and the stock has trended higher over the last decade. Please note Lockheed Martin offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Adam Mayers, Adam Mayers Investing Microsoft -- the world's largest software company -- continues its shift into cloud computing, which uses internet-based servers to store and manage information, which companies and their employees can access remotely. Microsoft helps them interpret their data with software that learns. In its latest quarter, Microsoft's Azure cloud services grew at a strong pace (59% quarter to quarter), though more slowly than a year ago. Profit and revenue beat estimates. The stock jumped after news that it has been awarded a US $10 billion contract by the Pentagon to upgrade defense department computer systems. The Pentagon contract was a surprise win for Microsoft. The 10-year project, known as Joint Enterprise Defense Infrastructure, or JEDI, is aimed at making the U.S. defence department more agile by replacing its aging computer networks with a single cloud system. Under the contract, Microsoft will provide artificial intelligence-based analysis and host classified military secrets among other services. The JEDI system will store and process classified data, allowing the U.S. military to use artificial intelligence to speed up its planning and fighting capabilities. Richard Moroney, Dow Theory Forecasts Founded in 1969, Leidos offers technology services for the defense, government-agency, and health-care markets. About 85% of its revenue comes from U.S. government contracts. In September, the firm received a three-year contract worth about $73 million with the U.S. Navy to offer submarine detection sonar services. The company earned $1.36 per share excluding special items in the September quarter, up 19% and $0.17 above the consensus. Revenue grew 10% to $2.84 billion on growth across all three segments. The backlog stands at $23.93 billion, up 15% since the end of 2018. Leidos raised its full-year outlook for per-share profits, sales, and cash from operations. At its midpoint, the new profit-guidance range implies December-quarter earnings of $1.35 per share, good for 23% growth and above the consensus of $1.22 per share. Quarterly revenue is projected to climb 9%, in line with the consensus. Leidos shares surged on the report. Long-term prospects appear solid. In May, management said organic sales should climb 5% annually through 2021 -- with additional upside if Leidos gains market share. Moreover, Leidos boasts a record backlog of $21.7 billion, roughly twice annual sales, with about $6.3 billion of that backlog funded. A heavy reliance on the U.S. government limits the company's exposure to an economic downturn. The stock is a Focus List Buy. Jim Powell, Global Changes & Opportunities Report Drones and drone defense systems will soon become two of the defense industry's most profitable products. The attack on the Saudi oil installations at Abqaiq was done largely with approximately 25 armed drones. Their ability to elude sophisticated anti-air defenses and complete their mission greatly expanded the role of drones in warfare. We can expect to see much greater use of military drones from now on. AeroVironment is the closest to being a pure-play for investors. The company is the Pentagon's top supplier of battle-tested small drones -- including the Raven, Wasp, Hawk, and Puma models. The company also signed an agreement with Lockheed Martin to develop their Global Observer that will provide around-the-clock airborne observation service. AeroVironment is also developing several drones with electric motors powered by batteries that are recharged in flight by solar power. These long-endurance, high altitude aircraft will greatly increase the role of drones in military applications. Meanwhile, the attack on the Abqaiq oil facility showed that conventional air defense systems aren't effective against drones -- especially when they are used in a swarming attack. The multi-million dollar Patriot Missile batteries and other anti-aircraft technologies made by Raytheon are designed to destroy high-speed missiles; they can't detect small, slow-moving drones that come in at treetop levels. Raytheon's engineers are almost certainly working on the problem already. It would not surprise me if the first drone defenses become available within a few months.

Get Defensive: Top Stock Picks in Defense, From Drones to Space Systems

Defense stocks offer both downside protection and potential upside.

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