Due to the current state of global tensions and the overall willingness of the U.S. government to continuously increase defense spending budgets, the defense industry is likely not worth betting against in the short term. That being said, despite two active wars, which America is directly supporting, the defense industry has seen somewhat modest gains as a whole. Part of this can be attributed to the fact that not every defense contractor’s services actively apply to the conflict in Israel and Ukraine.
More broadly, however, the defense industry landscape is highly competitive with no one contractor or subcontractor having a true monopoly on any particular section of the military-industrial complex. As such some defense stocksunderperform others, resulting in the question of which are the correct defense stocks to sell to maximize portfolio gains before a price correction.
AECOM (ACM)
Coming hot off a Hurricane Katrina lawsuit, AECOM (NYSE:ACM) might fall out of favor with the U.S. government. This has directly impacted its prospects for winning the most recent round of hurricane reconstruction contracts through the Federal Emergency Management Agency. Such a development could also impact the company’s long-term prospects for winning military contracts.
While the company has successfully secured infrastructure improvement projects for the Department of Defense in the past, a new trend of federal agencies looking elsewhere to its competition could impact its long-term profitability.
Moreover, its defense-adjacent vehicle facilities programs may see future budget cuts as military analysts debate what the future of military fighting vehicles will look like in a world where drones and anti-material weaponry reign supreme. As such, investors might want to look at AECOM as one of the defense stocks to sell before it begins taking losses.
Jacobs Solutions (J)
As a highly diversified engineering solutions company, Jacobs Solutions (NYSE:J) is slightly more insulated from the overall government attitude towards defense spending, than other subcontractors. However, one of the company’s main components of revenue is its Critical Missions Solutions segment, which makes up 7.6% percent of its total Q1 revenue.
Despite having won a critical contract back in 2017 for supporting the Missile Defense Agency’s infrastructure in computer systems, Jacob Solutions has not significantly expanded its offerings to the US military leading to a gentle contraction of its quarterly revenue for the Critical Mission segment.
Moreover, the last quarterly earnings report saw several of its key financial identifiers in the red between net income margins and overall profitability. As such investors holding positions in J stock might want to consider it among the defense stocks to sell as it might no longer be a sustainable portfolio member.
Huntington Ingalls Industries (HII)
With the U.S. Navy being the largest in the world by tonnage and fighting capability, one might think investing in its shipbuilders would be exceptionally profitable. However, due to the increasingly expensive design, construction, and maintenance of the Navy’s vessels, companies like Huntington Ingalls Industries (NYSE:HII) are feeling the squeeze.
That’s because the U.S. Navy’s tactics now rely on highly complex designs of incredibly expensive ships produced in low quantities. This keeps attempts to keep fleet personnel numbers to a minimum while maximizing power projection. But, it comes at a cost to HII, as the shipbuilder cannot use quantity to streamline production costs or efficiency.
Over the last six months, the stock has repeatedly tested a new all-time high of $300. It’s very likely the stock will continue to test that ceiling. It may even break through it by the 2024 election and then retreat in the event of a Republican victory. Regardless of the election outcome, HII’s business won’t be going anywhere. Thus, any time before the election would be a good opportunity to sell. This would allow investors to boost returns before re-entering the position after a correction.
On the date of publication, Viktor Zarev did not have (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.
