4 Bargain Defense Stocks to Buy Now

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In a perfect world, we would see defense stocks collapse to all-time lows and the proverbial swords beaten into plowshares as global leaders vowed to maintain peace. Unfortunately for us, no matter how much world leaders speak of peace and tranquility, the truth is that we humans are a pretty pugnacious bunch and conflicts will continue to be the norm.

defense stocks to buyWe will see armed spats over borders, religions, resources and whatever other excuse making can come with to fight with our neighbors, and I doubt it ever stops. I suspect the defense sector will always be something of a growth industry.

While the price of the larger defense stocks pretty much reflect the global need for arms there are some smaller companies that currently trade at bargain levels based on what I think are short-term concerns.

CPI Aerostructres (CVU)

CPI Aerostructres (CVU) makes things like wings, seats, engine components and other systems and assemblies for both the military and commercial markets. CPI saw its stock fall sharply earlier this year when they announced that they would have to take substantial non-cash write-downs as a result of the decision to move away from and retire the A-10 Warthog. This resulted in a $47 million charge for the company, and the stock tumbled. The shares are down more than 30% so far in 2014.

The picture for the company really isn’t that bad in spite of the loss of the A-10. CPI is still involved in several military projects, including the Blackhawk UH-60 helicopter, the E-2D Advanced Hawkeye & C-2A Greyhound and the AH-1Z ZULU Helicopter. The military and commercial backlog is $390 million, and management expects fully funded backlog to be at a record $114 million by the year’s end. Management expects to see record revenues with 25% year over year EBITDA growth next year. CVU stock looks like a bargain at the current price.

Gun Stocks (SWHC, RGR)

Firearm and ammunition companies are also relatively inexpensive defense stocks compared to the overall market. Both Smith and Wesson Holding (SWHC) and Storm Ruger (RGR) have been hampered by difficult year-over-year comparison after the gun-control-related buying surge we saw in 2013. Both companies sell guns and ammunition to government agencies and the military and should see solid demand in the future and look cheap form the perspective of a long term investor.

Alliant (ATK) is the largest provider of ammo to the U.S. military and will see continued demand for a long time to come. As a bonus, Alliant is spinning off its outdoor sports business, which could help unlock shareholder value.

It could be nice to think that global peace had made defense stocks the short of the decade but that simply not the case. Conflicts still flare up on a regular basis, and defense stocks will continue to be excellent holdings. Buy now, while short term events push prices temporarily lower.

As of this writing, Tim Melvin was long CVU.


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