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Tom Yeung here with your Sunday Digest.

In 2024, the second-best-performing stock in the S&P 500 wasn’t a chipmaker or an artificial intelligence firm.

It was Vistra Corp. (VST), a Texas power producer that most people had never heard of. Shares rose over 250% in 2024, beating even Nvidia Corp. (NVDA). Only Palantir Technologies Inc. (PLTR) did better, though it did not join the S&P 500 until late September that year.

Vistra never built an AI model. Nor did it have anything directly to do with the AI Revolution.

But it did produce the one thing AI needed: electricity.

In fact, electrical power has become one of the tightest bottlenecks of the AI Revolution. Roughly 40% of data centers planned for 2026 have been pushed into next year from the lack of grid hookups, according to Goldman Sachs. And many states are even considering “bring your own power” policies for new projects because electricity is in such short supply.

It’s a pattern we’ve written about before:

When a new technology arrives, everyone piles into the obvious winner, leaving the real gems behind for perceptive investors to buy.

It’s happening again right now. Investors are thinking about how AI can move into new applications like drones and other unmanned aerial vehicles (UAVs). Far fewer are asking about the things you need to shoot them down.

In a new presentation, senior InvestorPlace analyst Luke Lango names the companies he thinks get paid as the Pentagon restocks for the next stage of AI. He’s calling this The Pennsylvania Plan.

Luke’s given me the go-ahead to reveal one of these stocks to you today. And I’ve picked the biggest, most conservative name on his list on purpose. If the potential is this large for such a major firm, it’s worth seeing what Luke expects from his six smaller picks. You can watch his presentation here.

Booked Solid Through 2029

Last week, defense contractor Lockheed Martin Corp. (LMT) reported something I’ve never seen from a company of its size.

It wasn’t revenue, which rose 11% to $20.7 billion. Nor was it earnings, which beat estimates by 6%.

Instead, it was the number “4.”

That was the company’s “book-to-bill ratio,” the figure you get when you divide the number of new orders by sales. Lockheed had booked $83 billion of new orders, four times the $20.7 billion it sold.

Think of a restaurant that serves 100 customers on a Saturday night… and then receives reservations for 400 more before closing time. If you’re an investor, you’d want a piece of that restaurant, especially if those bookings were backed by reputable customers like the U.S. Department of War.

In fact, Lockheed’s order book is now so large that it would take almost four years to go through at the current pace. And we’re not even counting the reservations that will happen down the road yet.

That’s why Luke likes Lockheed: It is rearming America for AI-enabled combat. AI might be making drones cheaper and smarter… but Lockheed is the one building the missiles, interceptors, and planes that the U.S. military will need to counter these technologies.

Saved by One Vote

Let’s take a quick look at how Lockheed got here in the first place.

In August 1971, the U.S. Senate voted on whether The Lockheed Aircraft Corp. should continue to exist.

The aircraft manufacturer was weeks from bankruptcy. Its L-1011 TriStar airliner was behind schedule. Its engine supplier, Rolls-Royce, had collapsed into receivership. And cost overruns on the C-5 Galaxy transport were draining whatever cash Lockheed had left. The company needed a $250 million loan guarantee, and a funding bill had barely cleared the House by three votes.

The Senate passed it 49 to 48.

That move kickstarted a virtuous funding cycle where cash from one military aircraft could pay for the development of the next generation, and so on. Lockheed would bring us the F-117 Nighthawk, the world’s first operational stealth attack aircraft, the F-22 Raptor, the C-130J “Super Hercules” and the X-35 Joint Strike Fighter. It would also use the cash to buy out other defense contractors, expanding its reach.

Today, Lockheed is the world’s largest arms producer by revenue. And its virtuous funding cycle is now driven by three profit engines:

1. Aeronautics. This is Lockheed’s cash-flow machine. In 2001, the company was awarded the largest defense program ever after beating Boeing Co. (BA) for the F-35 fighter jet contract. Production is expected to continue through 2060, while maintenance and spare parts should keep the program going until at least 2070. Lockheed also produces other aircraft, such as the C-130 Hercules and the F-16 Fighting Falcon. This segment also houses much of its classified work and maintenance contracts for the F-22 Raptor fleet.

2. Missiles and Fire Control. This represents Lockheed’s growth prospects. The segment is growing at around 20% per year, and is being led by appetite for PAC-3 interceptors – the weapons used to stop ballistic missiles. The company is aiming to deliver 2,000 of these annually by 2030, up from 620 last year. In addition, Lockheed produces other well-known missile systems, including THAAD, GMLRS, JAGM, and Javelin. These, too, are seeing unprecedented purchases from conflicts in the Middle East and in Ukraine.

3. Rotary and Space. Rotary mostly involves helicopters, where Lockheed has an enormous installed base under its Sikorsky name. Space involves Trident ballistic missiles, hypersonic missiles, and missile defense systems. Both businesses offer wide moats and dependable profits, because switching costs are so high. Once a navy flies Seahawks, it buys Sikorsky parts and upgrades for decades. This segment could become a major growth area if Congress keeps funding the “Golden Dome” missile defense system.

Together, these three businesses create a stable source of cash flow that can fund tomorrow’s growth.

Refilling America’s Stockpiles

The rise of cheap drones in the Middle East and Russia’s war in Ukraine has cut into American stockpiles of missiles and interceptors. The Center for Strategic and International Studies (CSIS), for instance, estimates the U.S. has used two-thirds of its Patriot inventory and has fewer than 1,000 of these interceptors left.

Many have focused on upcoming counterdrone technologies to fill the gap. In fact, we’ve talked here about the importance of Ondas Inc. (ONDS), a company using interceptor drones to take down other UAVs. After all, firing a multimillion-dollar missile at a drone that costs less than a used car is a losing trade. And the Pentagon knows it.

But such AI-powered technologies are not yet reliable enough in the battlefield to protect crucial equipment, such as aircraft carriers and U.S. bases. Also, nothing cheap stops a ballistic missile. And so, interceptors have become what electricity was like to AI: the consumable that the new technology forces everyone else to buy more of.

That’s where Lockheed comes in. Over the past year, the company has won contracts such as:

• A seven-year deal for PAC-3 interceptors worth up to $58.6 billion.
• A separate seven-year agreement for THAAD missile-defense interceptors.
• A 10-year framework for at least 850 F-35 fighters.
• A $1.2 billion order for Precision Strike Missiles

Over the next several years, Lockheed should likely see even greater demand as America and its allies move from refilling reserves to building larger stockpiles.

In addition, for most of the past 30 years, defense contractors signed deals that left them holding the bag if costs rose. Lockheed itself took two major charges in the past two years for that reason. These new multiyear agreements now include annual inflation “escalators” that kick in if costs go up. With stockpiles this low, the Pentagon has less room to drive a hard bargain.

So, much like Vistra, Lockheed is becoming a growth stock again – and it’s thanks to an AI technology the company never had to build itself.

An Even Faster-Growing Business

With Lockheed, we have a defense contractor trading near five-year average multiples that is doing much better than at any time in the past five years.

By my reckoning, shares are worth $700 in the base case, and possibly $825 in the bull case. Aggressive investors might consider buying into the rally, while conservative ones wait for a sub-$600 entry price.

However, Lockheed is only one of seven picks Luke is eyeing. And several of these have far higher upside, given their smaller starting size.

Luke explains this all in his latest presentation, which you can watch here. He will also reveal several other picks that are part of what he’s calling The Pennsylvania Plan, and explains why his most aggressive projections call for potential gains of up to 2,600% over the next 12 to 24 months.

Vistra highlighted how the biggest winners of a new technology are often the suppliers in the background, not the ones that make headlines. Lockheed is the one I can name now. Luke’s presentation has the rest. 

Until next week,

Thomas Yeung, CFA

Market Analyst, InvestorPlace