Defense stocks have been on a tear since Donald Trump won the 2016 Presidential Election. From small cap to large cap, defense stocks have hit new 52-week highs and seen increased demand from traders. Defense stocks are now among the most common stocks to buy as investors and analysts alike try to figure out the big winners from a Donald Trump win.
Republicans are hoping controlling the House of Representatives, U.S. Senate, and Presidency means they can control the defense spending and raise the cap on funding after years of caps. The sequester in fiscal 2013 put a cap on defense spending, it also meant that every dollar that went to defense had to be matched by funding to other government programs.
Among the big plans thrown out for defense spending are raising the number of active duty troops, modernizing military facilities, increasing missile defense and building more navy ships. Some plans say more than $100 billion could be added to defense spending over the next four years.
In a September election speech, Donald Trump said he would “ask Congress to fully eliminate the defense sequester and will submit a new budget to rebuild our military.” Trump highlighted the need to boost the size of the Army to 540,000 soldiers and increase the Navy fleet to 350 ships.
While defense stocks have already seen a sharp increase, there’s time for investors to add certain names to their portfolios. Here are my three favorite defense stocks to buy, covering three different market capitalization ranges.
Defense Stocks to Buy Under Donald Trump: General Dynamics Corporation (GD)
Among the most talked about defense stocks to buy, investors have heard all about Boeing Co (NYSE:BA) or Lockheed Martin Corporation (NYSE:LMT). While those names are great picks and they could see a bump in their defensive segments, I believe General Dynamics Corporation (NYSE:GD) is among the best defense stocks to buy for large caps here.
GD operates with several segments, including aerospace, combat systems, info systems & technology and marine systems. In particular, the company’s combat systems and marine systems could see large boosts to their backlog with additional defense spending coming over the next few years.
The marine system segment for General Dynamics includes several sub-sectors. This includes Electric Boat, a top supplier to the U.S. Navy, and NASSCO, another key Navy supplier.
In fiscal year 2015, GD saw revenue of $31.5 billion. More importantly, GD had record operating earnings of $4.2 billion. The company produced $9.08 in earnings-per-share. The company got its highest revenue contributions from the info systems, marine and aerospace divisions.
Aside from the possible increase in defense spending, General Dynamics has many contracts in place to power it through the short- and long-term. The company has a backlog of $62 billion, as of the third quarter. Of that total, over $51 billion is considered a funded backlog. This includes several large contracts, like a $3.4 billion five ship contract signed in 2013.
In 2014, GD was awarded a huge $18 billion contract by the U.S. Navy for 10 Virginia-class submarines. This order is spread out through the year 2023 and provides General Dynamics with a nice funded backlog for each fiscal year.
Despite sitting near a 52-week high, GD shares should continue to rise. The election win by Donald Trump and the huge backlog should get this stock going for the next four to five years. General Dynamics will benefit from an increase in several areas that could see defense spending rising.
Grab GD stock and come along for the ride.
Defense Stocks to Buy Under Donald Trump: Huntington Ingalls Industries Inc (HII)
Huntington Ingalls Inc (NYSE:HII) is a great mid-cap play on the possible rise in defense spending. HII is America’s largest military shipbuilding company and it should see an increase in future deals for ships. This means a nice steady flow of revenue for the company and with a recent plan to return more cash to shareholders, Huntington Ingalls could be one of the best defense stocks to buy right now.
HII is the sole source of U.S. Navy nuclear-powered aircraft carriers. The company is also one of only two building the Virginia-class nuclear powered submarines. Both of these are items that could see an increase in orders. Guided missile destroyers are also one of the company’s main defensive items that could see a boost under the new defensive spending.
The company’s Newport News shipbuilding segment is doing very well. In 2015, the segment had $4.7 billion in revenue. A huge backlog of $15.1 billion is still on the books, with plans for new aircraft counted all the way out to the year 2040. The Ingalls shipbuilding segment had revenue of $2.2 billion last year. This division maintains a backlog of $6 billion.
To help matters further, HII recently made an acquisition in a promising field. Huntington Ingalls acquired Camber Corporation, a provider of government services. HII shelled out $380 million to acquire the company that is a provider of sophisticated mission-based and IT solutions.
Camber counts the U.S. Navy, U.S. Army, U.S. Courts and United States Postal Service as major customers. Camber has annual revenue of $364 million. The addition of Camber could put Huntington Ingalls in a strong position to gain more government contracts.
HII laid out its path to 2020 plan that will reward shareholders. The plan aims to return the company’s free cash flow to shareholders. This will be done through dividends and share buybacks. The company has set a minimum goal of increasing dividends by 10% annually.
Huntington Ingalls stock trades close to 52-week highs. With plenty of boat deals and a large backlog, the stock still has upside here. Add in the company’s Path to 2020 plan to reward shareholders and this is one of the best defense stocks to buy.
Defense Stocks to Buy Under Donald Trump: Kratos Defense & Security Solutions, Inc (KTOS)
My small-cap pick for defense stocks to buy is Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). Shares of Kratos sell for roughly $7 and with a market capitalization of around $500 million, this defense company could be ready to fly.
Kratos is a world leader in target drones, which are used to train pilots and test weapons. As the U.S. spends more money on defense spending and attempts to upgrade weapons, KTOS could be a big winner with its leadership position.
Kratos is also stepping up its game in developing drones that can be used for targets and combat. KTOS is the sole provider of sub-scale aerial targets for both the Air Force and Navy. The company is also a major provider for the U.S. Army.
Earlier this month, Kratos announced a new $18 million contract from an international customer. The contract is for KTOS’ unmanned aerial target drone system, which will support 30 flights. While this isn’t a huge deal, it represents a good push into the unmanned drone area that Kratos has been expanding.
KTOS also promised that this was the first of three large new customer programs expected to be announced over the next few months. Notably, the company used wording that described one of the programs as significantly larger in quantity and value than the other two.
In the company’s third quarter, Kratos reported revenue of $165.4 million. Government Solutions was the largest revenue contributor with $112.8 million in the quarter. The company’s Unmanned Systems segment had quarterly revenue of $18.3 million.
Shares of KTOS are up 74% in 2016. However, shares of Kratos have also decreased sharply from the $27 highs they saw back in 2007. Keep in mind a reverse stock split of one share for every ten also puts these shares down dramatically over a 10-year period.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.