Defense stocks inside your IRA can add diversity and stability to your portfolio. Know more about it below.
In this article:
- Top Defense Stocks to Consider
- Tips in Investing in Defense Stocks
Why You Should Invest in Defense Stocks
What’s the advantage of having defense stocks? Most industries perform depending on the overall state of the economy.
Some sectors earn higher returns in times of economic expansion and lower returns when economic contraction happens.
In contrast, defensive industries often don’t perform according to that kind of pattern. Defense and military stocks frequently move in the opposite direction of general economic trends.
These types of stocks are counter-cyclical, which is an advantage that’s very attractive to some investors.
Counter-Cyclical Definition: The term used to describe the performance of stocks that appreciate during economic downturns and depreciate when economic expansion happens.
2. Protection from the Government
The budget for defense aerospace and security became a priority long before 9/11. Since the tragic event, the demand for defense industries intensified with the government having no plans of reducing Pentagon support.
Defense is one of the few things that both Democrats and Republicans agree on.
In 2018, both parties agreed to allocate $165 billion as an addition to the existing budget. Congress approved this budget as a grant chest for the Department of Defense for the rest of the year.
Interestingly, the budget for the Pentagon will see an increase to $719 billion in 2019. This amount is more than double the annual budget from 2002.
In addition, the government plans on making significantly longer-term commitments towards rebuilding old military equipment. It also aims to improve its system for defense data analytics.
The defense industry gets most of its revenue directly from the US government. This means government spending for defense products and services can make a great opportunity for investors.
3. Market Dominance
Since Trump became president, creating more funds for defense companies has become a priority. This led to the introduction of more powerful and advanced weaponry built by different companies.
There are five U.S. aerospace and defense companies leading the game, and they are often referred to as the “Big Five” in the industry. These companies are:
- Boeing Corporation
- Lockheed Martin Corporation
- General Dynamics Corporation
- Raytheon Corporation
- Northrop Grumman Corporation
The market cap for these five companies alone reaches over $40 billion. When investors and policymakers add together the overall power of US defense companies, the financial muscle of said industry dominates the worldwide market in a way that only a few other sectors can.
4. Transparent Investment
Generally, the commercial marketplace has a dynamic environment where all things unexpected can happen at any time. It can hugely impact different sectors, causing an opportunity or disadvantage to an investment.
This is not the case for the defense sector. It is a business where the negative economic impacts bring great investment advantage, whereas the positive impacts provide mere stability.
Top Defense Stocks to Consider
1. Heico Corporation
Heico Corporation has a stable share price in the defense investment industry bringing competitive sustainability. Currently, interested investors can spot this corporation at the New York Stock Exchange with a market capitalization of $5.62 billion.
The company has further increased its growth expectations as it has recently outperformed the S&P 500’s total return. Aside from performing so well in its core aviation business, it also began its aggressive acquisition strategy in maintaining its financial flexibility and strength.
2. Harris Corporation
For over 120 years, Harris Corporation has been a proven leader in defense technology and innovation. Its products and services include tactical communications, air traffic management, geospatial systems and services, and avionics and electronic warfare.
The company has reported over $6 billion in revenue in 2018, which is a 4.78% increase from its 2017 revenue. The company is doing business globally at large caps, which makes them a very attractive investment for conservative portfolios.
3. Teledyne Technologies Inc.
Teledyne Technologies started its operations primarily focusing on aerospace and defense. Now it has expanded its products and services to advanced technology, which includes deepwater oil and gas production and exploration, oceanographic research, factory automation, and medical imaging, and air and water quality environmental monitoring.
4. General Dynamics Corporation
A global player in the defense industry, General Dynamics offers a wide variety of products and services. From combat vehicles to weapons systems and nuclear-powered submarines and communications systems, the company takes pride in leading the industry for over 65 years.
5. Lockheed Martin Corporation
While Boeing is the leader in the overall aerospace and defense industry, Lockheed Group focuses on being a defense contractor. With this, it makes the company one of the best defense stocks offering steady and long-term revenue.
The company has an order of 3,100 F-35s contracted through 2035 and has an acquisition price of $400 billion. This is the most expensive Pentagon project ever to date.
6. Raytheon Corporation
Raytheon Corp is one of the top players in manufacturing defense systems focusing on building missiles. It also manufactures electronic warfare and radar systems.
One of the advantages it holds over its competitors is its business source from the international market. The company has about 35% revenue from the international market.
7. Boeing Corporation
Boeing Corporation is most famous for its fighter aircraft, like the F/A-18 and the F-15. The company is also building several refueling tankers and aerial-refueling drones for the Air Force and the Navy.
The company also holds huge investments in the aerospace industry. Currently, it’s building the Crew Space Transportation-100 Starliner, which many defense professionals call the most powerful rocket ever built.
These stocks have received a spot on some websites like Investor Place a couple of times, The Street, Seeking Alpha, and The Motley Fool. Of course, it is up to the investor to decide, as these articles are only sources of analysis and information, not recommendations.
Tips in Investing in Defense Stocks
While investing in the defense sector gives consistent and strong returns for many investors, it’s still important to be wise and properly educated about the industry.
1. Consider Other Players in the Industry
As the government spends more money on defense, the stock market also sees the growth of more defense industry stocks.
For example, you can already buy shares from mid-tier defense contractors. A good example is Kratos Defense Security Solutions.
The company specializes in unmanned aerial drones, target systems, the security of communication satellites, and signal intelligence and monitoring.
It currently trades at NASDAQ (KTOS) at a price of $22.89 per share. This makes the company ideal for beginner investors in defense stocks.
2. Go Beyond Wall Street
When you want to know which military stocks to buy, you monitor Wall Street or the business sections of your local daily. To make better decisions for your investment, you need to read the other pages.
For example, you need to keep tabs on government military programs, such as the Joint Strike Fighter initiative, which is a government plan that aims to replace existing types of aircraft with new ones.
Between Boeing and Lockheed, the latter won with its F-35 Lightning II. The entire program has a defense budget of $1.1 trillion throughout its lifetime.
Investors may also have to keep track of newly-won or negotiated military and defense contracts. These can have a profound impact on the movement of their share prices in the market.
3. Know the People Behind the Company
Another factor to consider when deciding which defense stocks to buy is the people who run the organization. Who is the CEO, or who are the board of directors?
What are their credentials, and for the period they are in the company, how much did they earn? What kinds of contracts have they won?
It’s not only their business acumen you should know. You must also identify the extensiveness of their network as connections can matter in negotiating and winning deals.
Stock investing isn’t only about making a profit but also about controlling the losses. You can do the latter when you learn to diversify.
Besides buying blue-chip stocks, invest in cheap defense stocks with an excellent growth rate over the past few months as well. You can also look for those that provide a dividend to stock investors to increase profit and cash flow.
Another variety of investing in stocks is an exchange-traded fund (ETF), which is tax-efficient.
5. Learn About the Company’s Money
Some people focus on sales, earnings per share, and valuation when they want to assess their options for defense contractor stocks.
These numbers matter, but so do the others. For example, what is their free cash flow?
Free cash flow refers to the money they have after the company takes into account their capital and operational expenses. It means this is the cash ready for distribution to the investors, including stockholders.
The data can provide you with insight into the overall health of the company. For example, if the accounts receivables have been increasing over the last decade, it can mean it’s having difficulty in collecting payments.
6. Know World News
Threats and opportunities are present not only within the industry but also around it. The latter can then influence the direction and growth of the players in the field, including the ones that are publicly traded.
One of these is the trade war. An increase in tariffs for raw materials, for instance, can also boost the cost of production and product.
When it happens, it can upset buyers, which may reflect in a downward trend in the stock market.
7. Work with a Professional
When it comes to assessing your defense stocks list, you don’t need to do it alone. You can get help from a professional analyst or a financial advisor.
In the end, you make the decision. It’s also true, however, two heads are always better than one.
The advantages discussed above are as important as choosing which companies provide the best defense stocks. Having a defense industry watchlist can also help investors make better investment decisions.
In the battle of financial success, information and research are critical. Protect your investment by doing your research.
Sun Tzu, the pre-eminent Chinese general, has emphasized the value of information during warfare. Arm yourself with due diligence and education, and these will give you an edge in getting higher revenues and making better investment decisions.
Do you think investing in defense stocks is worth it? Share your thoughts with us in the comments section below.
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Editor’s Note: This post was originally published on January 7, 2019, and has been updated for quality and relevancy.