3 Sinking Defense Stocks to Buy Now

Defense stocks have lagged recently, but a turnaround is in sight

Worrying concerns about global terrorism networks in light of the recent San Bernardino shooting — and most notoriously, the brazen Paris attacks — have shed a megawatt spotlight on the ongoing civil war in Syria.

3 Sinking Defense Stocks to Buy Now
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Of particular interest to Americans is the involvement of U.S. military forces in the conflict, which was a decidedly unpopular decision based on a 2013 Gallup poll.

However, defense companies hold contrary opinions for fairly obvious reasons.

Generally speaking, business has been booming since American bombs started dropping on Syrian targets on Aug. 8, 2014.

The Los Angeles Times stated that in the two months since August of last year, several leading defense stocks saw an increase in share value of 5% or more. Raytheon Co. (RTN) received an especially generous lift in the markets, moving up more than 8%, helped in part by a $251 million deal from the Pentagon to acquire RTN’s Tomahawk cruise missiles.

Undeniably, defense stocks have been one of the best stocks to buy over the past year-and-a-half. For example, the iShares Dow Jones US Aerospace & Defense (ITA) exchange-traded fund is up 14% since Aug. 1, 2014. Over the same time period, RTN stock is up over 40%.

Recently, though, momentum has noticeably lagged behind broader expectations. The aforementioned defense stocks ETF is down almost 4% for December, while some individual names have suffered even sharper losses. Is war fatigue finally cutting into the sector’s prospects?

While losses in the markets should never be ignored outright, it’s important to recognize the overall context. Defense stocks are positioned in a contentious, but high-demand arena. The focus on national security will only increase in magnitude, and there will be no shortage of competitors willing to fill the need.

In addition, many of these companies have solid fundamentals to weather any storm. Here are three defense stocks to buy at currently discounted prices.

Defense Stocks to Buy: Honeywell International Inc. (HON)

Despite sitting on a small loss for the current month, investors of diversified technology company Honeywell International Inc. (HON) have reasons for optimism.

Late last week, Honeywell announced its acquisition of Satcom1, a Danish aircraft and satellite communications provider. With the assets now under its broad portfolio, Honeywell is positioned to offer a fully integrated platform for its in-flight services. Due to its strong heritage in the defense sector, it wouldn’t be long before military applications are derived from the Satcom1 technology.

But this isn’t merely a one-trick pony. Typical of defense stocks, Honeywell has a firm financial backbone. In particular, HON stock’s generous profitability metrics have provided long-term gains for investors. Both operating and net margins are in double-digit percentages, and rank among the top 20% for defense stocks.

HON stock’s return on equity is 25%, indicating superior efficiency in profit generation. On the balance sheet, Honeywell has become noticeably cash-rich over the past three quarters, while managing to trim its long-term debt obligations.

HON stock, earnings trend

Understandably, some might question the current momentum for HON stock. Until recently, shares were down 1% for the year, but are now up over 3% after its latest pop. But against trailing and forward earnings, HON stock doesn’t exactly scream of a killer deal.

Don’t miss the forest for the trees, however; Honeywell has largely exceeded earnings expectations over the past few years, and the company has successfully negotiated its fair share of turbulence in the markets.

It also happens to be one of the best run companies, with management delivering on the needs of both its vast clientele base and its shareholders. The slowdown in share price this month hardly sullies HON stock’s reputation as one of the best defense stocks to buy.

Defense Stocks to Buy: Spirit AeroSystems Holdings, Inc. (SPR)

It may not be panic time yet, but investors of Spirit AeroSystems Holdings, Inc. (SPR) are definitely feeling the pressure. After having a stellar month in October — when SPR stock jumped 8% — December has been a study in contrast, dropping more than 6% in the markets.

The suddenly bearish shift is the worst among the defense stocks featured on this list. Nevertheless, underneath the hood of the aircraft manufacturing firm lies a strong company hitting temporary resistance.

Although trailing revenue this year is a bit off 2014’s pace, SPR stock has been supported by management’s commitment to profitability. In all aspects — gross, operating and net margins — Spirit has driven down costs and business expenses, leading to much improved profitability against the last three years.

In fact, SPR stock’s per-share earnings are up 53% against fiscal year 2014, which then makes the company undervalued against a price-earnings perspective. As with Honeywell, Spirit also trimmed its long-term debt exposure while significantly boosting its available cash.

SPR stock, earnings trend

Critics may argue that against SPR stock’s short- and long-term market averages, things don’t look too well for stakeholders. In addition, this month’s volatility comes after SPR stock’s failed attempt to recover from a death cross that flashed in the charts recently on Oct. 15. Certainly, there’s some truth to these assertions, and SPR stock may not yet have found a bottom.

That said, the improvement in profitability margins is impressive, and Spirit is centered on a highly demanded industry that should only see broad interest rise, not wane.

Additionally, SPR stock has mostly exceeded Wall Street’s EPS targets during the last two years. With its recent losses in mind, SPR stock may end up having the biggest legs to advantage a rebound rally.

Defense Stocks to Buy: General Dynamics Corp. (GD)

If indeed the U.S. is engaged in a proxy war with Russia as was claimed by Senator John McCain, the score would be one to nil in favor of the Americans.

A few weeks ago, on Nov. 24, a Turkish F-16 Fighting Falcon — an engineering marvel by General Dynamics Corp. (GD) — shot down a Russian Sukhoi Su-24 fighter jet, which was alleged to have momentarily breached Turkey’s airspace. Though American forces had nothing to do with the incident, the undertone of its intense historical rivalry with Russia could not be ignored.

If only General Dynamics’ dominance of the unfriendly skies could translate into success in the markets. Like other defense stocks, upside resistance has proven to be the superior opponent, at least in the near term.

For December, GD stock is down nearly 5%, erasing most of the gains made just two months prior. GD’s choppy trading pattern exhibited for most of this year meant that investors who refused to lock in their profits saw few rewards. On a YTD basis, GD stock is only up a hair above 1%.

GD stock, earnings trend

Those who are fleeing, however, may eventually come to rue their impatience. Current revenue trends for GD stock are on pace to exceed last year’s sales by 4%, reversing a three-year period from FY 2012 where revenue growth averaged a 2% loss. Operating and net margins are also much improved from their year-ago results, contributing to an annual EPS growth rate that is on track to hit 18%.

Additionally, GD stock benefits from a 15% reduction in long-term debt, giving the aircraft manufacturer one of the better cash-to-debt ratios among defense stocks.

General Dynamics is winning the ground war as well, as evidenced by a just-announced press release that one of its subsidiaries was awarded a contract with the U.S. Army worth over $92 million.

Terms stipulate that the company will upgrade the weapons system used in the Abrams M1A2 tank. GD stock’s booming civilian business — most notably for its Gulfstream jets — allowed management to raise its profit guidance for the year, one of few companies to do so given the tepid economy.

In the end, General Dynamics is a solid company with a broad, highly demanded product line further bolstered with a reputation for innovation.

While the markets may not currently appreciate it, GD stock is one of the best defense stocks to buy — for now and for the future.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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