Here's How to Play Defense with Military Stocks and ETFs

Military spending has long been considered a recession-resistant sector, and the war in Ukraine and heightened tensions surrounding Taiwan have only added impetus to the sector. Several leading advisors, and contributors to MoneyShow.com, highlights their best bets in the defense industry. Tony Sagami, Weiss Ratings Daily China recently launched its third and most advanced aircraft carrier, the Fujian; it pains me to say it, but the Fujian is considered by some experts to be superior to U.S. aircraft carriers. Even more alarming is China's new hypersonic missile, which flies at five times the speed of and is capable of hitting any city in the U.S. Did you know that the U.S. is constructing a new military facility on the Northern Mariana Islands? Or that it's upgrading and expanding military bases in Guam and Australia? I'm not suggesting that World War III is around the corner, but I'm confident there will be a tidal wave of new U.S. military/defense spending to catch up to China. Meanwhile, Route 495 is a 60-mile highway that encircles the District of Columbia. Referred to as the Beltway, it's home to hundreds of companies that feed off government funding. Defense companies employ a revolving door of retired congressional, White House and Pentagon officials that work or serve on their boards. Sleazy? Perhaps. Although from an investor's standpoint, they're cash machines and some of the most reliable, consistently profitable companies in the world, especially the defense contractors. I don't think the world realizes how dangerous a powder keg we're sitting on. With bombs dropping on Ukraine and tensions between the U.S. and China higher than ever, this may be a great time to invest in defense stocks. The easiest way to invest in defense contractors is through focused exchange-traded funds such as: iShares U.S. Aerospace & Defense ETF ; SPDR S&P Aerospace & Defense ETF ; and Invesco Aerospace & Defense ETF . These ETFs have holdings such as Raytheon Technologies , Lockheed Martin , General Dynamics , Northrup Grumman and Boeing . The military industrial complex is real and super-profitable. Defense and military stocks will explode higher in this politically charged climate, and now is the time to consider adding firepower to your portfolio. Jim Powell, Global Changes & Opportunities Putin's invasion of Ukraine was a wakeup call for European leaders who didn't think he would take such drastic action. Now they know better. Europe's leaders also know they probably could not stop Putin if he launched an attack on their territory. That's particularly true since Putin would be unlikely to take on all of NATO. Putin learned from his invasion of Ukraine that European nations are unlikely to come each other's defense if he launches a limited war that, in his words, is only to liberate regions with large Russian populations. That list would include Estonia, Lithuania, Latvia, and Moldova. Whatever the future may hold for Europe, the 30 members of NATO are planning to greatly increase their spending on defense. The expansion will include purchasing advanced U.S. aircraft and weapons. However, European countries will buy most of what they need from European defense suppliers. BAE Systems, PLC is first on that list. BAE is a British-based multinational aerospace and defense contractor that rivals General Dynamics for the scope of its military products. BAE is the largest defense contractor in Europe -- and the seventh largest in the world. The company is one of the largest suppliers to the U.S. military, to NATO, Australia, Canada, India, Saudi Arabia, Turkey, Qatar, Oman, and Sweden. BAE is also an important U.S. defense contractor. In addition to operating under its own name, in 1999 BAE acquired United Defense and Armor Holdings in the U.S. that produces military vehicles and armored systems. Other acquisitions gave BAE leading positions in many other military technologies. BAE Systems is involved in several major defense projects, including the Lockheed Martin F-35 Lightning, the VTOL Harrier, the Eurofighter Typhoon, various types of submarines, armored vehicles, artillery systems, naval guns, missile launchers, precision guided weapons, and the Queen Elizabeth-class aircraft carriers -- to name only a few. Ordinarily, I don't recommend investing in European companies because the region's socialist governments have too great a hand in how they conduct business. In this case, however, the war between Russia and Ukraine is turning the business/government connection to an advantage. Every country in NATO will turn to BAE Systems to upgrade their defense capabilities. BAE Systems has an added attraction for U.S. investors -- it isn't as well-known over here as our Big Four defense contractors. However, I think the oversight will end as profits at BAE Systems begin to rise. I think the stock will become an excellent performer for U.S. investors. Brett Owens, Contrarian Outlook We can use stock market turbulence to our advantage and accumulate select stocks for cheap. L3Harris Technologies is one such opportunity. Its headline yield is one we would usually yawn at. The stock pays 1.9% today and it's rare for this dividend to pop above two. But LHX, over time, is the type of safe dividend stock that makes us rich. Since the start of 2010, the stock has returned 393% to investors. Most of that has come from price gains, but we can thank the dividend for it! The stock's payout acted like a dividend magnet that pulled its price higher. The payout increased by 409%. This is no coincidence. Every time the rate of the payout increase leaps ahead of the dividend, the stock price catches up. Of course, this is past performance. But the future is looking bullish too. Not for warm and fuzzy reasons, I'll admit. LHX makes what the U.S. needs to compete with China militarily, especially on the seas. It's a leader in anti-air warfare for U.S. navy ships and aircraft. Tony Daltorio, Market Mavens AeroVironment was founded in 1971, but since then, it has largely flown under the radar, all the while developing an expertise in small robotic aviation systems. Before the war in Ukraine, the company was perhaps best known by the public for co-developing the Ingenuity robotic helicopter that operates on Mars. Within the defense industry, though, AeroVironment was best-known for its unmanned drones. The killer drone is AeroVironment's Switchblade drone. Since Russia's invasion, the Pentagon has sent more than 700 Switchblade drones, armed with warheads, to Ukraine. With the Switchblade, soldiers have a system that provides both surveillance and munitions in a single package. As you can imagine, success on the Ukrainian battlefield is boosting international demand for all of AeroVironment's armed drones. The Pentagon had already permitted AeroVironment to export its unarmed Raven and Puma drones to 50 countries, and the company generates 40% of its roughly $450 million in annual revenue from international sales. However, the Pentagon did not clear Switchblade systems for export until July, when it approved sales to 20 countries. Most of these countries are in Europe, including the Baltic countries that have the Russian threat right on their doorstep. Its Small Unmanned Aircraft Systems division is a global leader, with a product line generating $178 million -- 40% of its revenue in fiscal 2022. More than 50 allied nations have purchased these products. And these aircraft make up a majority share of all unmanned aircraft in U.S Department of Defense (DOD) inventory. In its Medium Unmanned Aircraft Systems division, AeroVironment acquired Arcturus UAV, a leading provider of unmanned aircraft systems. It offers a significant market opportunity, with the $1 billion market today expected to grow to $3 billion by 2030. The shares are well below a peak of $137.94 reached in February 2021 when Cathie Wood's Ark investment funds acquired a large stake. That holding is the only negative I see, as Wood may be forced to liquidate AeroVironment during a nasty market downturn. But thanks to its success on the Ukrainian battlefield, AeroVironment's long-term outlook is stronger than ever. It's a buy anywhere in the $100 range. Among the largest U.S. defense companies, there is one company in particular that I favor -- Northrup Grumman , which I prefer because of its involvement in the U.S. space program. The company is best known for its aviation products, including the B2 stealth bomber, as well as its avionics and fighter radar systems. The company has more often than not delivered positive earnings surprises to Wall Street in recent years, regardless of whether defense spending is rising or falling, or which political party occupies the White House. The trend of positive surprises will continue as ongoing geopolitical tensions globally should benefit sales and earnings going forward. Looking ahead, Northrop Grumman has won the Ground Based Strategic Deterrent program -- the Air Force's program to modernize the intercontinental ballistic missile system (ICBMs) -- and the B-21 bomber program. Both of these program wins should drive top-line growth over the next few decades. Meanwhile, the company's space business -- where it has had more success than its peers-has caught my attention. The latest example of its success is its major involvement in the James Webb Telescope. The resurgence of investment in space has become an important factor for Northrup Grumman, and it is actually helping the company to largely offset the sector-wide labor and materials shortages -- supply chain woes -- that have hit many defense stocks in 2022. Another plus is that the space sector has rather large and fast-growing investment from private companies, such as Elon Musk's SpaceX. That makes Northrup Grumman less reliant on government spending than others in the sector. Northrup Grumman's growing exposure to the space sector makes the company more of a play on continuing space investment than defense. That may be riskier, but it's also potentially much more rewarding for its shareholders. NOC is a buy anywhere in the $455 to $485 range.

Here's How to Play Defense with Military Stocks and ETFs

Between the war in Ukraine and U.S. and China tensions, this may be a great time to invest in defense stocks and ETFs.

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