The stock market is having another rough period. The market saw its second-biggest decline of the year on Friday. The tech sector in particular is slumping following the huge earnings miss from Netflix (NASDAQ:NFLX). There’s a ton of chaos in equities right now. However, there are still some safe havens. Defense stocks such as Raytheon (NYSE:RTX) are proving to be one of these shelters.
Defense stocks historically have served as solid holding during bear markets. Their revenue streams come in large part from governments in the form of long-term multi-year contracts. This sort of revenue is quite insulated from economic shocks. More specifically now, the defense sector is seeing a reversal in sentiment. Last year, defense stocks fell to nearly decade-low valuation ratios following the United States military leaving Afghanistan. Analysts saw it as a sign of a less active world superpower that could lead to a period of lower defense budgets globally.
However, the unfortunate developments in Eastern Europe this year have reversed that view. Now, it seems improbable that the United States would be able to cut defense spending much. In addition to that, we’ve seen sharp increases in planned defense spending in Japan, Germany and several other smaller European countries. We appear to be entering a multi-year period of increasing defense spending as the world moves to position itself for the new geopolitical reality.
This week, Raytheon scored a new $483 million contract for the DDG 1000 Class Combat System and various other items. In addition, the contract contains various options, which if exercised, could increase the total cumulative value to $1.67 billion. This particular contract is for the Navy, which is in the process of modernizing various mission systems. Now, to be clear, a $483 million (or even $1.67 billion) contract isn’t a game-changer for Raytheon in its own right. Raytheon is a huge company, so this is marginal in the grand scheme of things.
However, in a world where so many companies are missing guidance and lowering expectations, defense is a sector where there are still new deals and opportunities occurring. If you own a stock like Raytheon, there are positive headlines to help bolster your investment. And, even after a significant rally in recent months, RTX stock is still selling for less than 21x forward earnings. That’s hardly an excessive price for a safe haven stock with an improving industry outlook.
On the date of publication, Ian Bezek held a long position in RTX stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
