Defense stocks are putting up some pretty big price gains in an otherwise disappointing year for equities, and a number of tailwinds promise more market-beating returns for the future.
Regrettably, international instability is good for defense stocks, and the world stage is full of conflict. From Syria to Russia to the South China Sea, there’s no shortage of combat or serious security concerns.
Indeed, market sentiment is strong enough that defense stocks shrugged off President Barack Obama’s defense bill veto at the end of October. A deal struck on Halloween only boosted confidence in the sector.
True, the defense budget is set to decline slightly in 2016, but by less than had been expected, and share prices should already reflect that risk.
Equally important, a number of the largest defense stocks had good-to-great quarters, and in some cases even raised their guidance.
In a year when it is so hard to find stocks that are working, shares in defense contractors have been on the offensive.
After screening the sector, we selected the following three defense stocks as ones that promise even more market-beating returns.
Defense Stocks to Buy: Lockheed Martin (LMT)
Lockheed Martin (LMT) — the world’s largest defense contractor by market capitalization — has been a boon to many an investor’s portfolio this year. LMT is up about 11% for the year to date, and a solid earnings report in which nearly every segment posted revenue gains bodes well for future performance.
Lots of companies are seeing their top lines pressured by the strong dollar and emerging-market weakness, but LMT managed to buck the trend. Lockheed Martin exceeded both Wall Street’s profit forecast and revenue forecasts.
The real key to the quarter was the aeronautics business, where sales rose 11% thanks to higher sales from F-35 production contracts.
The ongoing success of that program — and room for sales growth in the segments for Space Systems and Information Systems & Global Solutions — should continue to drive earnings growth and stock returns that outpace the broader market.
Defense Stocks to Buy: Northrop Grumman (NOC)
Northrop Grumman (NOC) is flying high this year after beating out Boeing (BA) for a huge Pentagon contract. NOC is up 23% for the year to date, and a market-friendly forecast offers more to come.
NOC served up investors’ favorite dish when it reported earnings with a beat-and-raise quarter. The company is also embarking on a restructuring program to cuts costs, which the market always likes.
But the real reason to like NOC is that it recently won a contract to produce as many as 100 long-range bombers. It could be the largest defense contract for at least a decade, and is expected to add $1 billion in annual revenue.
Northrup insists it has plenty of capacity to deliver on another large and imminent Pentagon contract.
Lastly, quarterly results beat Street estimates and it hiked its guidance.
Defense Stocks to Buy: Raytheon (RTN)
Raytheon (RTN) stock has been more than adequate performer in 2015 and better-than-expected sales of missiles should ensure additional gains through year-end and beyond.
Profit declined in the most recent quarter on a net income basis because of an accounting change, but still managed to beat analysts’ average estimate by 4 cents a share. Revenue came up just a bit shy of Street estimates, but RTN raised its top-line forecast, which suggests good things are happening in the current quarter.
RTN reported strong sales gains across a wide range of missile systems, including the Tomahawk, TOW and Patriot systems.
Most interesting is RTN’s attempt to sell its cybersecurity expertise to the civilian world of banks, retailers and other hacking targets. Rather than throw cash at buybacks or dividends, RTN is investing in this potentially lucrative business.
If it pays off, the market will surely applaud.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
