The race for president may be too close to call, but there is one sure winner over the next four years — defense stocks.
Not only are Hillary Clinton and Donald Trump both on the hawkish end of the military intervention scale, but there is even support in Congress for ramping up the military industrial complex.
Up to now, the defense sector has been suffering under sequestration for a few years and it’s starting to show. There’s little doubt whoever wins the presidency will be very good for military spending, just as a matter of upkeep.
What’s more, on a global scale, arms shipments are in a healthy uptrend for U.S. defense firms.
When you add to that the fact that many of our weapons systems were depleted between Iraq, Afghanistan and other campaigns, there is a growing momentum for replacing that equipment. But it won’t be replaced with the old tech; it will be replaced with new tech, boosting defense stocks.
For example, the B-2 bomber is undergoing a reboot — Northrop Grumman Corporation (NYSE:NOC) won a major contract to build the next-generation long-haul bomber, the B-21. This plane it meant to end the service of the B-52 fleet that has been around since Vietnam.
The U.S. Navy has been looking to rebuild its fleet and armaments but has been hamstrung by sequestration. The U.S. Army needs more advanced weapons systems and better communications and network technologies. The U.S. Air Force is now transitioning to unmanned vehicles to carry out a significant number of operations and its manned fleet is in need of upgrades.
And this isn’t nickel and dime spending. This is about big-money long-term projects to build the next generation of U.S. armed forces.
Defense Stocks to Buy
There are three certain winners from this new ‘supercycle’ in defense spending. Granted there will be second- and third-level players that will benefit significantly from this growth as well, but right now, the top-tier firms are the best way to get in on the next leg-up in defense.
As mentioned early NOC landed the huge B-21 next-gen bomber contract. Each plane will cost an estimated $550 million each and the Air Force has ordered 80-100 of them over the course of several years. That’s a significant contract.
But that isn’t the end of NOC’s potential. It has made some of America’s most iconic airplanes since the 1940s and remains a key strategic asset to the U.S. military. Now its operations are a bit more diversified, expanding its role in unmanned aircraft, cyber intelligence, missile systems and C4ISR (command, control, computing, communications, intelligence, surveillance and reconnaissance).
NOC is fully priced where it stands now, but you’re not buying this for now, you’re buying for the future. And the future looks very bright indeed.
Lockheed Martin Corporation (NYSE:LMT) is another significant player in this sector and has a global reach that is unparalleled among defense stocks.
Aside from Boeing Co (NYSE:BA), which has significant aerospace and commercial business arms, LMT is the largest defense sector play by market cap, and it has its hands in virtually every part of the defense sector. It builds the state-of-the-art F-35 fighter, the new generation of combat ships — called littoral combat ships — as well as all the parts and service contracts to support them.
It also recently bought legendary helicopter maker Sikorsky from United Technologies Corporation (NYSE:UTX) and is one of top stakeholders in the helicopter and vertical take off and landing (VTOL) systems.
LMT has seen a pick-up in interest recently, and the stock is up over 12% year-to-date. But that’s just the beginning. Its nearly 3% dividend — most recently increased on Thursday — is also a nice boost for any premium you may pay.
Raytheon Company (NYSE:RTN) is the pure geek of the Big three defense firms. It was spun off from the Massachusetts Institute of Technology (MIT) decades ago but it has not forgotten its roots.
This firm builds the brains as well as the brawn for advanced anti-missile systems like Patriot. It also has a robust business in all areas of tactical missile technologies. And RTN is also emerging as one of the top cyber security players in the sector.
The stock throws off a 2.1% dividend, but you’re not buying RTN for its rock-solid dividend … you’re buying it for the outsized growth that will begin in 2017 for defense stocks. Up 11% so far this year, there is still plenty of upside left for long-term investors.
As of this writing, Gregg Early did not hold a position in any of the aforementioned securities.
