Love him or hate him, Vladimir Putin delivered a pointed accusation to U.S. President Barack Obama during the Russian leader’s address to the United Nations, emphatically stating that American military interventions in the Middle East have been an utter failure.
Years of bombing campaigns and putting boots on the ground has created political power vacuums, as pre-conflict government bodies collapse like dominoes — good for defense stocks, but a tragedy for regional stability.
While President Obama desperately seeks to salvage his image and credibility, Putin has risen in influence and power among non-western nations.
The strikes against claimed Islamic State targets by Russian fighter jets were just the latest incident challenging American dominance of international affairs. The complaint leveled by U.S. officials that Russia has only succeeded in hitting Syrian groups backed by the Central Intelligence Agency is a curiously impotent response, considering growing suspicions in the Middle East that the ISIS terrorist group is a CIA front.
But no matter which side of the debate one takes, defense stocks are likely to be key beneficiaries.
Case in point is the rather cumbersomely named exchange-traded fund iShares Dow Jones U.S. Aerospace & Defense ETF (ITA). When Russian bombs began dropping over Syria on Sept. 30, the ITA ETF — which includes some of the leaders of the military industrial complex like Boeing Co. (BA) and United Technologies Corp. (UTX) — moved up 7% as of this writing, reversing a negative technical trend seen in many defense stocks.
Although it’s a highly controversial subject, international conflict and the need for national security drives robust demand for defense stocks. Here are three defense stocks that have the most potential to grow in this volatile geopolitical environment.
Defense Stocks to Buy: Raytheon Co. (RTN)
A prodigious contributor of advanced military technologies, the stock of Raytheon Co. (RTN) both literally and figuratively were lifted by an impressive joint test conducted with the U.S. Navy of the latest Tomahawk Block IV cruise missile.
Involving operators from the Navy’s ballistics range at San Nicolas Island to as far away as Bahrain (where the U.S. Fifth Fleet is headquartered), the Tomahawk was able to receive updated communications requests and precisely strike a newly designated target. Such technology is unprecedented in warfare, making Raytheon one of the more desirable defense stocks.
More importantly for RTN stock investors, the company hasn’t forgotten the business end of the defense game. Top-line sales have broadly increased over the past four quarters by an average of 4%, while year-over-year revenue growth for RTN stock in the second quarter hit nearly 3% — a figure that is likely to be buoyed due to strong international demand for Raytheon’s security solutions.
The markets clearly like what they see. Year-to-date, RTN stock is up 4%, with most of the gains made over the past 40 days as the Syrian crisis surged toward critical mass. In addition, RTN stock exhibited a life cross about three weeks ago when its 50-day moving average crossed above its longer-term 200-day MA, confirming renewed bullish interest.
When things get tough, many sovereign nations turn to Raytheon. The same could be said about investors looking to RTN stock for reliable growth in uncertain market conditions.
Defense Stocks to Buy: Hexcel Corp. (HXL)
Hexcel Corp. (HXL), which specializes in the production of carbon fiber and other structural materials for civilian and military applications, may be one of the lesser known names among defense stocks.
To ignore HXL stock, however, would be a critical mistake. HXL stock is already up more than 15% YTD, handily beating the performance of the S&P 500, and soaring 27% over the past year. Additionally, its string of consistent earnings results makes HXL stock a stable investment for any industry.
Over the past four fiscal years, Hexcel has significantly improved its top-line sales rate, with the $1.9 billion achieved in fiscal year 2014 a solid 21% higher than the average revenue earned between FY 2011 and FY 2013. And net income saw even swifter growth — Where FY 2014 turned in 29% higher than the average of the previous three years. It’s no surprise then that Wall Street has a very favorable view on HXL stock — not since Q4 FY2012 has Hexcel failed to meet analysts’ consensus estimates for earnings.
Although HXL stock has become noticeably choppy since April of this year, shares are still up an impressive 26% year-over-year. Furthermore, since the Russian airstrikes in Syria, HXL stock has shifted up 8.5% in the markets, reversing a near-term bearish trend channel.
So long as HXL stock is able to stay above long-term support at $45, investors are likely to see positive returns — after all, the demand for advanced military composites have only increased over the years.
While it’s not the biggest military name, HXL stock certain has the right stuff to blast through the current market doldrums.
Defense Stocks to Buy: Lockheed Martin Corp. (LMT)
One of the most storied defense stocks, Lockheed Martin Corp. (LMT) has made less flattering headlines over the past decade due to persistent troubles with its F-35 Lightning II, better known as the Joint Strike Fighter. Nevertheless, Wall Street was abuzz on the morning of Oct. 7 when it was announced that steel giant Alcoa Inc. (AA) would provide titanium materials for the JSF program in a contract estimated to be worth $1.1 billion. In response, LMT stock moved up nearly 2% over the next two sessions.
Luckily for LMT stock holders, there’s more to Lockheed Martin than just a lone project. Net income in the past two fiscal years — $3.6 billion in FY2014 and $3 billion in FY2013 — has increased substantially over the average $2.7 billion earned in FY2011 and FY2012.
This is mainly a result of Lockheed management keeping tight controls on its cost of goods sold, which in turn improved its gross profit margin. Wall Street couldn’t be happier, with LMT stock beating estimates in the past 14 earnings reports.
Pound for pound, Lockheed is also one of the best defense stocks available. LMT stock is in the black by around 11% this year, and year-over-year, its more than 20% return matches that of high-flying Hexcel Corp. Potential investors can also take confidence that LMT stock was able to shake off its bearish funk in the spring and summer season — since June 30, shares have jumped approximately 15%.
The controversy of the JSF program belies the fact that underneath the drama, LMT stock has served its investors well, and will likely continue to do so as we enter a new era for the defense industry.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
