Top defense stocks to invest in now range widely in market capitalization and include a newcomer to the public markets.
President Donald Trump’s election in November 2016 created what became known as the “Trump effect” that lifted the share prices of defense stocks. The president’s insistence that U.S. allies around the world ramp up their defense spending to conform with requirements of the North Atlantic Treaty Organization (NATO) helped to drive up the share prices of such companies.
With just two years before the next presidential election, investors may start to wonder whether defense stocks will remain on an upward trajectory. Poll results which show Democrats such as former Vice President Joe Biden and Sen. Elizabeth Warren beating President Trump if the run-off were held today indicate the policies that lifted defense stocks potentially could be reversed and send their share prices downward.
Does Turkey’s Attack Aid Top Defense Stocks to Invest in Now?
World conflicts seem to be escalating, with Turkish troops crossing their southern border with Syria to attack the ethnic Kurds, despite Turkey’s President Erdogan promising President Trump only a limited incursion into Syria to clear its border of terrorists. The Turkish troops ventured well beyond the border and have been killing Kurdish fighters who previously had operated in concert with U.S. soldiers in the region with the goal of keeping the peace.
A big risk is whether ISIS fighters, who had been held in prison camps and denied reentry into their home countries due to security concerns, may slip away and reconstitute the caliphate that had taken control of wide swaths of land and imposed a reign of terror until they were ousted with the help of the Americans. President Trump’s announcement in early October that the United States would withdraw its troops from Syria precipitated the military offensive by Turkey that is endangering civilians, as well as imperiling the region’s security and stability.
“Turkey’s action is precipitating a humanitarian crisis and setting conditions for possible war crimes,” President Trump said in an Oct. 14 statement. “Turkey must ensure the safety of civilians, including religious and ethnic minorities, and is now, or may be in the future, responsible for the ongoing detention of ISIS terrorists in the region. Unfortunately, Turkey does not appear to be mitigating the humanitarian effects of its invasion.”
Instability in Syria Raises Appeal of Top Defense Stocks to Invest in Now
In response, President Trump announced he would boost steel tariffs against Turkey back to the 50 percent level that had been in place as recently as May. The United States also will stop negotiations led by the Department of Commerce that had been aimed at culminating with a $100 billion trade deal with Turkey.
President Trump announced an executive order authorizing financial sanctions against Turkey. The United States and its allies have “liberated 100 percent of ISIS’s ruthless territorial caliphate,” Trump said.
China also has been threatening other nations in Asia, while Russia persists in retaining territory it seized militarily in neighboring Ukraine amid its continued hostilities there. Are these conflicts and others enough reason to bid up the price of defense stocks further?
Top Defense Stocks to Invest in Now Include Cybersecurity Provider
Defense stocks that could benefit from growing military conflicts and tensions around the world include those that engage in cybersecurity, space-based warfare, missile defense and other pursuits that offer growing demand. One such stock is Parsons Corporation (NYSE:PSN), a Centreville, Virginia-based defense company that went public last May. Parsons quietly has carved out a niche as an under-the-radar defense contractor for the U.S. government.
Parsons won a $147 million pact in the second quarter of 2019 to provide cybersecurity and command and control services for the U.S. Missile Defense Agency. The company also received a $140 million award for cybersecurity, software development and mission system survivability for the Air Force Research Laboratory.
Last July, Parsons announced its acquisition of QRC, LLC, to enhance its high-growth defense and security businesses. Parsons also provides its capabilities domestically for civilian purposes.
Chart courtesy of www.StockInvestor.com
Is Parsons a Top Defense Stock to Invest in Now?
President Trump’s championing of increased defense spending by America and its allies since his 2016 election means that U.S. aerospace and defense industry companies should have a strong tailwind as long as he stays in office. European nations have started to raise their defense spending, too.
NATO’s European members spent an average of 3.1 percent of GDP on defense during 1985–1989, according to McKinsey & Co. Since the fall of the Berlin Wall in 1989, Western European countries scaled back to enjoy a “peace dividend” by cutting defense spending to 2.5 percent in 1990–1994, 2.0 percent in 1995–1999 and 1.9 percent in 2000–2004. Five years later, the average fell further to 1.7 percent before slipping to a low of 1.43 percent in 2015.
Hilary Kramer, who leads the GameChangers advisory service, which has booked 21 profitable trades among its last 25 transactions, told me that Parsons ultimately could get “rolled up” into a larger contractor complex. An acquirer that buys Parsons ultimately might capture a significant acquisition premium, she added.
Paul Dykewicz interviews New York-based money manager Hilary Kramer.
Kramer Offers Her Top Defense Stocks to Invest in Now
Still unknown are the length of the wait and the price, said Kramer, whose 2-Day Trader service has notched 15 out of 17 profitable trades with an average return of 13.76 percent and a hold time of less than a day since its launch. In the meantime, Parsons is the closest to a pure play on military cybersecurity as likely exists, Kramer added.
The company’s initial public offering (IPO) on May 7 means that the six-month lock-up period for insiders to hold their shares before selling will end on Nov. 8. Parsons has 99 million shares outstanding, with 8.5 million of that total part of its IPO. Since an Employee Stock Ownership Plan (ESOP) owns 78 million shares, stability is added to the company’s shareholder base.
As a result, the possibility of a big sell-off from insiders who own the shares is unlikely when the lock-up period ends. Sales from insiders are “not a big issue,” said Kramer, who also is at the helm of the Turbo Trader, High Octane Trader and Inner Circle advisory services.
Big Contractors Rank Among Top Defense Stocks to Invest in Now
Kramer recommended strategically buying shares of big defense contractors, too, as well as smaller companies. A key reason is that the Pentagon’s planning process can stretch years or even decades before the rhetoric “turns into rockets,” Kramer said.
“After all, it takes time to turn a battleship and the process of getting them commissioned and built takes much, much longer,” Kramer said.
Boeing (NYSE:BA) plans far into the future. Plus, Boeing’s domestic military contracts account for somewhere between 35-45 percent of its top line, Kramer said.
A big appeal about investing in Boeing is to capture its dividends, Kramer said. In 1999, Boeing paid shareholders just $0.14 per quarter, Kramer recalled. To lock in that yield at what now is an unthinkable $40 per share, it equates to a 1.4 percent annual yield, she added.
With Boeing’s rising dividend policy, people who buy the company’s shares today at a 2.2 percent yield might one day book $120 per share a year in cash, Kramer said.
Chart courtesy of www.StockCharts.com
Raytheon Rates as a Top Defense Stock to Invest in Now
Another big defense contractor that Kramer said she likes is Raytheon (NYSE:RTN). She expressed interest in buying Raytheon shares ahead of its proposed merger with the defense operations of United Technologies (NYSE:UTX).
Chart courtesy of www.StockInvestor.com
“Once UTX spins out its relatively dull civilian businesses, the combination of these companies should have a $75 billion military footprint, about double what Boeing can brag about in this space,” Kramer said. “And that’s before the synergies emerge on both the operational side and on the drawing board. This is a company that will combine Pratt & Whitney engines, Rockwell navigation, Hughes electronics and other legendary brands.”
Bob Carlson, who heads the Retirement Watch advisory service, said he favors United Technologies, the other part of the merger with Raytheon.
However, he expressed caution in investing in defense stocks at this juncture. One reason is that defense and related spending on cyber security is set years ahead of time, Carlson said. The spending will escalate only if there’s a move into a “widespread, full-on shooting war between major countries” or there’s a major crisis, such as something similar to 9/11, to spur additional spending, Carlson added.
Carlson Eyes a Top Defense Stock to Invest in Now
United Technologies’ merger announcement with Raytheon earlier this year was not well received by the market, Carlson said. But the merger has much more potential than investors are showing, he added.
“UTX has reliable cash flow and a strong balance sheet,” Carlson said. “I think the components of UTX are undervalued by the market, and that value will be realized as the merger approaches when UTX spins off Carrier and Otis Elevator. UTX stock is relatively cheap. There’s little downside, with decent potential if it turns out that investors are wrong about the merger.”
Bryan Perry, who leads the Cash Machine advisory services, called the iShares U.S. Aerospace & Defense ETF (ITA) an attractive investment with Boeing (BA) as its top holding. Boeing has big potential upside when the 737 MAX is put back into operation, he added.
Chart courtesy of www.StockInvestor.com
Other defense companies worth weighing for potential investment include L3Harris Technologies (NYSE:LHX), a best-in-class surveillance system provider, to protect against drone attacks such as those that recently hit the Saudi Arabian oilfields, Perry said. Lockheed Martin (NYSE:LMT) is in an enviable position with its F-22 Raptor jet fighter, the most advanced in the world with its advanced stealth system that makes the plane virtually invisible to radar detection.
Chart courtesy of www.StockCharts.com
Europe’s negative interest rates, rising U.S. government debt, trade wars, economic strains, global conflicts and U.S. House hearings aimed at impeaching President Trump give investors headwinds to face. Defense stocks offer investors a way to stay invested in stocks, while positioning themselves to benefit financially if international relations unravel further in the future.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz.