Diversifying your portfolio can help you tap into more opportunities and mitigate the risk of significant losses. While tech stocks are often favored due to their high-growth potential, these stocks can fall the hardest during an economic slowdown.

Investors looking to take some risk off their portfolios while giving themselves the potential for good returns may want to consider defense stocks. These corporations have government contracts and other revenue streams less likely to falter during slowdowns. 

Investors who want to get into defense stocks and diversify their portfolios may want to consider these undervalued defense stocks.

Northrop Grumman (NOC)

Northrop Grumman (NYSE:NOC) is an aerospace and defense technology company with a 16 P/E ratio. The $72 billion company is posting top-line revenue growth, topping many of its peers.

For instance, the company reported 9% year-over-year (YoY) sales growth in the third quarter and increased its 2023 sales guidance. The company’s $84 billion backlog is a new record that indicates growth will likely continue. The backlog is more than two times the company’s projected full-year 2023 revenue.

All four of the company’s business segments (aeronautics, defense, mission and space systems) grew over the past year. Space systems led the way with 11% YoY growth and is the company’s largest segment.

NOC stock slowed in 2023 and has only gained 7% over the past year. However, the stock’s 74% gain over the past five years highlights what is possible for investors. The sluggish stock performance in 2023 increased the equity’s margin of safety for current investors. 

While waiting for the stock to rise, investors get to enjoy a 1.58% dividend yield. Dividend growth is respectable, as the quarterly payout went from $1.73 per share to $1.87 per share in 2023. That’s an 8% YoY increase. 

Lockheed Martin (LMT)

Lockheed Martin (NYSE:LMT) has single-digit revenue growth and a 17 P/E ratio. Shares have only gained 4% over the past year, which helps to make the stock more enticing for new investors. 

Smaller 2023 gains reduce the risk for new investors. The company has demonstrated an ability to grow in the long run with its 60% gain over the past five years. 

Lockheed Martin and other defense stocks suffer from narrowing margins. Once those margins improve, these stocks can gain momentum. In the meantime, LMT has been returning capital to shareholders. The company returned $2.5 billion to shareholders as dividends and stock buybacks. The firm is authorized to buy back up to $13 billion in shares.

Investors get to enjoy a respectable 2.74% dividend yield if they accumulate LMT shares. The company recently raised its quarterly dividend distribution from $3 per share to $3.15 per share, representing a 5% YoY increase. 

AeroVironment (AVAV)

AeroVironment (NASDAQ:AVAV) designs unmanned aerial vehicles. The firm has a higher valuation than the other two defense stocks on this list. AVAV trades at a 41-forward P/E ratio but has rewarded investors more than NOC and LMT in recent years.

AVAV stock gained 50% over the past year and appreciated 57% over the past five years. Demand for the company’s aerial defense vehicles has soared, as indicated by a 62% YoY revenue jump. 

Earnings from the second quarter of fiscal 2024 also featured $487 million in backlog and raised revenue guidance for the full year. The company’s recent acquisition of Tomahawk Robotics can lead to elevated revenue and earnings growth in future quarters.

While many defense corporations are suffering from narrowing margins, AeroVironment has been expanding its margins. The company almost quintupled profits YoY in the second quarter of fiscal 2024. AeroVironment is a small defense firm with a $3.4 billion market cap that can rapidly gain momentum as unmanned vehicles become more popular. 

On the date of publication, Marc Guberti did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.