As Joe Biden settles into his presidency, the markets are also starting to reflect his policy decisions. While the major exchanges are responding positively, especially to his $4 trillion economic plan, his election did cause investors to fall out of love with certain sectors while cementing their faith in others. Unfortunately, defense stocks have borne the brunt of this thinking.
Considering Biden’s less-confrontational policies, shares of the major companies operating in the sector are down. But a contrarian view is emerging.
According to Citi, fears regarding the new president are unfounded. A note from the multinational investment bank and financial services corporation said that the concern regarding significant defense budget cuts is overblown.
“We’re buyers of any weakness,” said Citi senior analyst and director Jon Raviv of defense stocks.
He pointed to the composition of the senate as a reason to remain bullish. Many of the nominees have outlined their focus on creating a small, technologically advanced military.
I agree with the sentiment. Plus, America has certain domestic and international considerations that will need the country to maintain a top-notch military. Read on as we delve into three major companies in the sector and see where they are now and where they are heading next.
Defense Stocks to Invest In: Palantir (PLTR)
We start this list with somewhat of a controversial firm. Palantir debuted to great fanfare in September last year. In the first week of going public, the stock added approximately $17 billion in market value.
A data analytics firm specializing in building software platforms for institutions has deep and profound connections with the U.S. security establishment that both irks and excites stockholders.
In particular, the company’s links with ICE and ongoing business with U.S. defense and law enforcement agencies are a cause of concern for ethical investors.
Palantir employees themselves have also expressed their reservations on several platforms, as reported by The Washington Post last year. Now, I am not dismissing the obvious ethical concerns here, but Palantir offers software to several entities, and not all of them are defense contractors.
Late last year, the Peter Thiel-backed data analytics firm inked a deal with NHS to help the publicly-funded healthcare system in England help in their efforts to combat Covid-19.
Additionally, I believe the company’s close ties with the defense establishment are a boon and not a curse. At the end of the day, the house always wins. Large contracts with government intuitions are great for consistent recurring cash flow.
The private sector rarely offers that level of stability. With the stock down 29.7% in a month, now is the perfect time to initiate a position.
Raytheon Technologies (RTX)
This list’s next entrant has gotten lost in the shuffle a bit. Despite an excellent track record, it’s been a slow start to the year for the Waltham, Massachusetts-headquartered aerospace and technology defense manufacturer.
In January 2021, the company bagged 10 contract awards worth a total value of $163.9 million. While that’s not too bad on the face of things, Raytheon’s contract value decreased on a sequential basis, falling to $0.2 billion from $1.7 billion.
Another major issue is that President Biden has momentarily halted some direct commercial sales (DCS) worth $478 million to Saudi Arabia. There is a chance that the sales still go through, but geopolitical tensions between the two countries could come in the way of any future deals. The loss has already been recognized in the Q4 earnings report.
Amidst all this, Raytheon’s commercial aircraft segment is one strong reason to invest in the company. Now that vaccines are rolling out, investors are hoping that airlines will now make a comeback. That should help the company in some measure, considering the size of its aircraft segment.
Overall though, RTX is a very stable performer. In the last 12 quarters, it has outperformed expectations every time, according to Seeking Alpha data.
Since the company’s products are mission-critical, have a long product lifecycle, and produce recession-resistant cash flow, RTX makes my list of affordable, bankable defense stocks nine times out of ten.
Northrop Grumman (NOC)
The final name on this list of defense stocks might strike you as familiar if you follow blockbuster deals in the defense industry. On Feb. 2, Northrop Grumman completed its IT services business’s divestment for $3.4 billion to a Veritas Capital affiliate.
The global aerospace and defense technology company said the deal would allow it to focus more on its core business areas, with proceeds from the deal earmarked for share repurchases and debt retirement.
Separately, NASA awarded an $84.5 million contract to the Falls Church-based defense contractor earlier this month. Under the agreement, the company will provide support and products for spaceflight missions at the agency’s Marshall Space Flight Center in Huntsville, Alabama.
From a fundamental perspective, NOC is one of the strongest performers in the industry. Revenues are growing at a rapid clip, and it has used its burgeoning cash flows to reward shareholders in the form of buybacks and dividend payouts.
As I write this, TipRanks has an average price target of $363.71 a pop on the stock, a 20% upside.
Despite a challenging year, fourth-quarter 2020 sales rose $1.5 billion, or 17%, and 2020 sales jumped $3.0 billion, or 9%. Gross margin and return on equity are at a very healthy 20.3% and 30.1%, respectively. It’s not surprising, since we are dealing with a company with several excellent government contracts.
Dividends are growing at a consistent pace for the last 10 years. Despite the pandemic, the company boosted quarterly payments by 9.85% last year.
Meanwhile, the Falls Church defense giant has outlined a plan to repurchase $3 billion in stock in 2021. For all these reasons and more, it’s surprising that NOC stock is trading at 12.7 times forward price-to-earnings. But that means it’s a steal for you at current rates.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
