Arm your portfolio: The defense stocks you might want now

The defense industry isn’t just about protecting borders – it can also be a smart tactical play for investors.

Governments never stop spending on national security, which keeps demand for defense companies strong no matter what’s going on in the market. That kind of consistency makes this sector a strategic option for investors who want long-term growth and protection against stock ups and downs.

If you’re thinking about investing in this space, it’s worth digging into what drives these stocks, what challenges they face, and which companies stand out. Let’s break it all down.

What does the sector look like?

In a word: it’s big. The defense sector has a huge front line, with companies that develop advanced military technologies, craft cybersecurity solutions, and produce vehicles and weapons. The industry’s growth is primarily driven by defense contractors and by military spending – and can fluctuate alongside government priorities.

The sector serves as a backbone for national security and plays an important role in maintaining global stability. Geopolitical events – like Russia’s invasion of Ukraine – have been known to heighten defense budgets worldwide, as leaders prioritize military modernization and readiness. No surprise, then, that a surge in spending in recent years has boosted defense stocks' performance.

The growing global investment in defense highlights how increased military budgets shape the performance and appeal of defense stocks for investors.

What moves its stocks?

Several factors influence the performance and valuation of defense stocks – and set them apart from other sectors. Understanding them can help you make informed decisions.

Government contracts

Defense companies rely heavily on long-term government contracts for revenue. These contracts tend to provide stability and predictable cash flow, but they are also subject to political priorities and budget allocations. When government policies change, they can significantly affect stock performance.

Technological advancements

Innovation in military technology – think high-tech aircraft, autonomous systems, and cutting-edge defense solutions – can drive growth too. Defense firms that offer the latest and greatest gear might boast higher stock valuations because of their ability to land competitive contracts.

Global military spending

Bigger and bigger military budgets in major economies – like the US and UK – are pivotal in boosting defense stock performance. Geopolitical tensions and commitments to enhance national security often lead to sustained investment in military modernization, benefiting defense contractors.

Supply chain dynamics

When the defense supply chain hits a snag – whether it’s production delays or raw material shortages – it can take a toll on this industry’s stock prices. But the companies with the strongest supply chain management can often power through, keeping operations running smoothly, and, in turn, keeping investors happy.

What are the key stocks to consider?

The defense sector includes several industry leaders with strong market positions and consistent revenue growth. Here are four of them.

Lockheed Martin (LMT)

Lockheed Martin is a global leader in military aircraft, advanced defense systems, and space technologies. It’s the biggest defense contractor in the world – known for its flagship projects like the F-35 Joint Strike Fighter and its sophisticated missile systems. Not surprisingly, it’s got a robust pipeline of government contracts, particularly in the US – which suggests steady cash flow and long-term growth potential. Nonetheless, over the past five years, Lockheed Martin has underperformed the US industrials industry and the S&P 500.

Northrop Grumman (NOC)

Northrop Grumman excels in aerospace, cyber defense, and advanced military technologies. Known for developing stealth bombers and autonomous systems, the company is a key player in cutting-edge innovation. Northrop Grumman's international sales and its alignment with top US priorities further bolster its revenue growth. Plus, with its history of running lean, mean operations and expanding its margins, Northrop Grumman has long been a top choice for investors who want growth in the defense sector. Over the past five years, Northrop has underperformed the US industrials sector and the S&P 500.

BAE Systems (BA)

BAE Systems is the UK's biggest defense contractor and a major player in global defense. The company offers various products and services, from naval vessels and armored vehicles to cybersecurity solutions. BAE Systems benefits from strong demand from UK and international government contracts, ensuring revenue stability. What’s more, its diverse portfolio and commitment to innovation make it a reliable investment for those looking to tap into the UK defense industry. Over the past five years, BAE has outperformed the FTSE 100 and a wider index of UK shares.

Rheinmetall (RHMG)

Rheinmetall is well-positioned to capitalize on Europe’s rising defense budgets. The German defense and automotive company is a major player in military tech and arms manufacturing, supplying everything from combat vehicles and ammunition to air defense systems and electronic warfare gear. Business has been booming lately, with strong sales and profit growth that have led it to outperform the Eurostoxx 600.

How can you tell which stocks make the best investments?

There’s a lot to consider. But you could do worse than starting with these three points.

Revenue growth

Consistent revenue growth is a clear sign of a company’s ability to take advantage of market opportunities. In the defense sector, revenue growth often stems from securing new government contracts, expanding international sales, or coming up with new products. Companies with steady revenue increases are better positioned to withstand market fluctuations and reinvest in cutting-edge technologies – which can give them a competitive edge.

Share price trends

Past stock movements provide valuable insights into market sentiment and a company's performance relative to its peers. A history of stable or upward-trending share prices often signals investor confidence and strong financial health. But you’ll want to consult a few charts: analyzing trends over different time frames can give you a better view of things – especially with defense stocks, which can experience temporary volatility because of geopolitical events or changes in government budgets.

Product and service offerings

Forget your one-trick ponies: a diverse portfolio of products and services can help mitigate risks and ensure long-term growth potential. Companies that combine traditional offerings, like military vehicles and aircraft, with emerging technologies, such as cybersecurity and autonomous systems, are better equipped to adapt to evolving defense needs. Diversification also reduces dependence on any single revenue stream, enhancing stability.

What do defense stocks bring to your trading strategy?

This sector is broad, with companies that represent a mix of stability and growth. And that could make them a savvy addition to a well-balanced portfolio.

Long-term investment

Defense stocks are well-suited for long-term investment because of their steady revenue streams from government contracts and consistent demand for military goods and services. Companies like Lockheed Martin and BAE Systems often benefit from multiyear projects, providing predictable cash flow and resilience during economic downturns. Holding defense stocks over time allows investors to capitalize on gradual growth in military spending and technology advancements.

Diversification

Adding defense stocks to your portfolio helps balance risk by offsetting the volatility of cyclical or high-growth sectors. The defense sector's relatively stable performance, even during economic uncertainties, makes it a reliable hedge against market fluctuations. By combining defense stocks with other asset classes, investors can achieve a more diversified and resilient portfolio.

Monitoring government policies

Defense spending is closely tied to government budgets and policies, directly influencing stock performance. Regularly tracking policy changes, military budgets, and geopolitical developments can help investors anticipate market movements. For example, increased defense budgets in response to global tensions often boost the value of defense stocks. Staying informed enables proactive adjustments to your trading strategy.

So, what’s the bottom line, then?

The defense sector offers unique investment opportunities driven by its critical role in global security and consistent demand through government contracts and military spending. From understanding the key dynamics of the industry to evaluating individual stocks like Lockheed Martin, Northrop Grumman, and BAE Systems, this guide has highlighted the importance of careful analysis. Investors should focus on key indicators such as revenue growth and product diversification to assess the potential of defense stocks. Additionally, incorporating these stocks into a trading strategy can provide long-term stability, portfolio diversification, and resilience against market volatility.

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Capital at risk. Our analyst insights are for educational and entertainment purposes only. They’re produced by Finimize and represent their own opinions and views only. Wealthyhood does not render investment, financial, legal, tax, or accounting advice and has no control over the analyst insights content.