Seven Aerospace and Defense Investments to Buy During the War

Paul Dykewicz

Seven aerospace and defense investments to buy during Russia’s invasion of Ukraine include several companies that are providing increasingly important military capabilities.

The seven aerospace and defense investments to buy may begin to trade at a premium to the market, according to a recent report from BofA Global Research. In addition, defense companies historically have been immune to inflation, slowing economic growth, rising interest rates and tending to perform better in election years such as 2022, the BofA report noted.

“Politicians would be unlikely to run on a platform for 2022 mid-term elections not supporting national security in the current environment,” wrote BofA’s senior aerospace and defense analyst Ron Epstein. 

From a defense stock perspective, some investors, and possibly certain sell-side analysts, may not understand money flows from Congress to the U.S. Treasury and ultimately to the contractors over time, so investors who expect a quick boost in defense company earnings likely will be disappointed, Epstein opined. However, any weakness in the defense stocks could become a buying opportunity.

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Seven Aerospace and Defense Investments to Buy During War Include ETF 

Investors who like to gain exposure to multiple aerospace and defense stocks at one time can do so by purchasing a fund, said Bob Carlson, a pension fund chairman who also heads the Retirement Watch investment newsletter. One exchange-traded fund (ETF) that Carlson recommended to me is SPDR Aerospace and Defense (XAR).

Bob Carlson, who leads Retirement Watch, meets with Paul Dykewicz.

The ETF owns 34 stocks and has 36% of the fund in its 10 largest positions. Those positions include Boeing (NYSE: BA), Virgin Galactic (NYSE: SPCE) and Huntington Ingalls (NYSE: HII).

The fund seeks to track the S&P Aerospace and Defense using a sampling strategy. The index is broader than just defense stocks, so it gives exposure to aerospace for those who want it.

Investors who like to buy when an asset is beaten down in price may like XAR. The ETF has slid 0.33% in the past week, 9.12% in the last month, 19.34% for the past three months, 13.96% for the year to date and 24.29% for the last 12 months.

Chart courtesy of www.stockinvestor.com

One of Seven Aerospace and Defense Investments to Buy Is Hypersonic Stock

Spirit AeroSystems (NYSE: SPR), headquartered in Wichita, Kansas, is one of the world’s largest manufacturers of aerostructures for commercial airplanes, defense platforms and business/regional jets. With expertise in aluminum and advanced composite manufacturing solutions, the company’s core products include fuselages, integrated wings and wing components, pylons, and nacelles. 

Aside from also supporting aftermarket work for commercial and business/regional jets, the company has taken a key role in the defense industry’s research and technology to address the most difficult technical challenges in the pursuit of hypersonic flight. The exceptional speed of such flight is above Mach 5, or five times the speed of sound. Mach 6 is six times the speed of sound, or 820 mph, equaling 2 km per second, or 7,200 km per hour.

Russia is ahead of the United States in developing hypersonic weapons and its defense officials have spoken about having the technology available to use against Ukraine within months. China also is trying to lead in hypersonic technology, leaving the United States trying to catch up.

Spirit AeroSystems’ officials said America’s top technical priority right now is a low-risk and holistic approach to deploy operational hypersonic weapons at scale. A merger between Spirit AeroSystems and Fiber Materials, Inc. (FMI) occurred on Jan. 10, when Spirit closed its purchase of the other entity. FMI’s products currently are on the Trident D5, Standard Missile, PAC 3, THAAD and NASA programs such as Stardust, Mars Curiosity, Orion and Mars 2020.

Gap May Close With One of Seven Aerospace and Defense Investments to Buy

The combined company’s joint capabilities provide materials, design and production to produce thermal protection systems, a key enabling technology for hypersonic flight. FMI, based in Biddeford, Maine, is known in the industry for supplying high-temperature materials, backed by technical support and data for material characterization and predictability, while Spirit AeroSystems adds modeling and simulations to the process, along with its record of commercializing critical flight structures.

New capability provided by Spirit AeroSystems is aimed at helping to position America’s hypersonic programs to meet government demands and timelines. With more than nine decades of experience, the company offers supply chain management, as well as an understanding of the costs and other requirements, its officials said.

With a competitive commercial approach, Spirit AeroSystems is seeking to usher in a new and modern approach to the production of thermal protection, its officials said.

Chart courtesy of www.stockcharts.com

FMI has approximately 230 employees at two facilities in the state. The company’s main operations focus on multidirectionally reinforced composites that enable high-temperature applications such as: thermal protection systems, re-entry vehicle nose tips as well as rocket throats and nozzles. 

BWX Breaks Into Seven Aerospace and Defense Investments to Buy

BWX Technologies, Inc. (NYSE: BWXT), a Lynchburg, Virginia-based supplier of nuclear components and fuel of the U.S. government, provide nuclear components and fuel to the U.S. government. The company also provides technical, management and site services to support governments in the operation of complex facilities and environmental restoration activities.

Chart courtesy of www.stockcharts.com

BofA recommends BWXT and put a $65 price objective on the stock. The valuation implies a 1.1x relative multiple on the defense primes’ 14x weighted average multiple, in line with historical average, according to BofA. The premium is supported by the company’s exposure to the U.S. Navy, its monopoly on nuclear-powered ships as well as its diversification efforts underway, the investment firm wrote in a note.

Downside risks to reaching that price target are a possible loss of U.S. government contracts, changes in contracting terms that could pressure margins and program procurement changes that result in market share loss. In addition, the U.S. government is BWXT’s largest customer and accounts for about 90% of BWXT’s revenues.

The stock may outperform those BofA estimates by improving upon expected operating performance and margins, or due to increased demand for nuclear aftermarket for power plants and higher-than-expected share in missile tubes for the Virginia-class submarines and Ohio-class submarines, according to BofA.

CACI Captures Spot Among Seven Aerospace and Defense Investments to Buy

CACI International (NYSE: CACI), a Reston, Virginia-based provider of unique expertise and distinctive technology, seeks to address its customers’ “greatest enterprise and mission challenges” through its support of national security missions, as well as serving defense, intelligence and civilian customers. BofA placed a $370 price objective on the stock. 

The investment firm noted that the company’s renewed capital deployment strategy, including opportunistic share repurchases, is offsetting the discount related to the lack of dividend. Plus, the successful software-based tech strategy is getting traction, BofA wrote.

Risks are possible cuts to the U.S. Department of Defense budget, problems finding acquisition targets, integrating mergers, hiring the right personnel, containing costs, estimating costs and executing on fixed-price contracts. Unexpected gains could occur via a greater federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated mergers and acquisition activity, unexpected capital return to shareholders through dividends, market share gains and better-than-expected margin expansion, BofA wrote.

Chart courtesy of www.stockcharts.com

Garmin Positions Itself With Seven Aerospace and Defense Investments to Buy

Garmin (NASDAQ: GRMN), of Olathe, Kansas, provides smart aviation solutions for local, state and federal government agencies, as well as defense organizations. The company offers commercial off-the-shelf (COTS) solutions or others specialized to a mission, using knowledge and experience to enhance the capabilities of an aircraft.

Garmin helps pilots see more, know more and fly smarter with proven technologies, its officials said. The company provides an array of technology to enhance avionics for defense organizations, as well as defense contractors, by offering integrated flight decks, navigation and communication systems, flight displays, weather radar and portable Global Positioning System (GPS) capabilities.

Bryan Perry, a high-income aficionado who is a veteran of Wall Street firms and the editor of the Cash Machine investment newsletter, told me he likes the stock’s outlook.

 

Paul Dykewicz interviews Wall Street veteran Bryan Perry, who heads the Cash Machine newsletter.

BoA put a $137 price objective on the stock, using a relative multiple that is consistent with the average relative multiple over the last 20 years and reflects GRMN’s competitive positioning.

Overperformance beyond the price target could occur if faster-than-expected growth occurs from new products like smart wearables and the development of an innovative, category-making product. Increased demand for wearables could enhance performance beyond estimates, BofA wrote.

Risks to reaching the price target of BofA are market saturation in the medium term, after some of the stock’s end markets benefitted from strong tailwinds in recent quarters due to the pandemic. Industry-wide constraints of certain electrical components further could hurt results, along with foreign exchange risk and freight headwinds weighing on margins.

Chart courtesy of www.stockcharts.com

Leidos Latches Onto Seven Aerospace and Defense Investments to Buy

Leidos Holdings (NYSE: LDOS), a Reason, Virginia-based science and technology company that serves the civil, defense, aviation, health and intelligence industries, formerly was known as Science Applications International Corporation (SAIC). Leidos merged with Lockheed Martin’s (NYSE: LMT) information technology (IT) sector, Information Systems & Global Solutions, in August 2016. That created the defense industry’s largest IT services provider. 

The merger became one of the largest transactions in the consolidation of the defense sector, positioning Leidos to work extensively with the U.S. Department of Defense, the U.S. Department of Homeland Security and the U.S. intelligence community, including the National Security Agency (NSA).

BofA put a $125 price objective on the stock. The valuation is in line with defense prime contractors, as strong U.S. National Security demand for innovative technologies and solutions and solid free cash flow generation is offset by a lumpy award environment, supply chain pressures in the near term, pressure on pricing and mounting concerns about labor inflation.

Risks to meeting the price target, according to BofA, include possible cuts to the U.S. government budget, increased competition from non-traditional players and problems integrating potential mergers, hiring the right people, containing costs, executing on fixed price contracts and future contract awards.

The outlook could be topped with a better-than-anticipated federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated mergers, unexpected capital return to shareholders through share buybacks or dividends, market share gains and better-than-expected margin gains.

Chart courtesy of www.stockcharts.com

Teledyne Takes Place With Seven Aerospace and Defense Investments to Buy

Teledyne Technologies Inc. (NYSE: TDY), of Thousand Oaks, California, provides technologies to sense, transmit and analyze information for industrial growth markets. These markets include aerospace and defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, energy, medical imaging and pharmaceutical research.

BofA placed a $531 price objective on TDY. Upside the the BofA outlook could come from faster integration of an acquisition, a more rapid top- and bottom-line recovery in the industrials businesses and even further operating leverage. Risks are another idustrials downturn, a significant decline in the DOD budget, and an exogenous event that prevents international sales.

On June 23, Teledyne FLIR Defense, part of Teledyne Technologies, announced that it has entered into a framework agreement worth up to NOK 475 million (approximately $48 million) with the Norwegian Defence Materiel Agency to deliver advanced Black Hornet nano unmanned aerial vehicles (UAVs). The agreement is valid for four years but can be extended a year at a time for up to three additional years.

Despite Norway receiving its first Black Hornet in 2015, this agreement is Norway’s ‘s largest commitment to date. With these new orders, Norway will become one of the largest users of Teledyne FLIR’s Black Hornet Personal Reconnaissance System. 

The Black Hornet weighs just 33 grams, less than 0.1 pounds, and measures 168 millimeters, or just less than seven inches. Well suited for operations in highly contested and GPS-denied environments, the Black Hornet is nearly silent, offers a flight time up to 25 minutes and its pocket-sized unmanned aerial vehicle (UAV) transmits live visible and thermal video to an operator. Teledyne FLIR Defense has delivered more than 12,000 Black Hornets to defense and security forces worldwide so far.

“With this new agreement, nations cooperating with Norway may also procure the Black Hornet,” said Robert Mehrabian, chairman, president and chief executive officer of Teledyne Technologies. “As the world’s leading nano UAV system, Black Hornet delivers covert situational awareness to military units in combat operations — a crucial advantage at a time when European and allied countries confront new threats on the continent and beyond.”

Chart courtesy of www.stockcharts.com

Supply Chains May Improve as China Cuts COVID Curbs

China is trying to curb its COVID-19 restrictions, and it could allow goods produced there to begin flowing normally again in the weeks ahead. China’s lockdowns have affected an estimated 373 million people, including roughly 40% of its gross domestic product (GDP). Disrupted supply chains have affected products such as rice, oil and natural gas.

Shanghai, home to the world’s largest port and 25 million residents, had strained to unload cargo due to strict regulations that caused shipping containers to stack up. Some Shanghai residents posted videos online to complain about needing food, even though government officials sought to block such expressions of frustration.

Chinese authorities also drew public criticism for forcibly separating young children with COVID-19 from their parents to prioritize stopping the spread of a new, contagious subvariant of Omicron, BA.2. The variant also has been causing new infections in European nations such as Germany, the Netherlands and Switzerland.

U.S. COVID Deaths Climb Past 1.018-Million Mark

U.S. COVID-19 deaths climbed to 1,018,364 as of July 6, according to Johns Hopkins University. Cases in the United States, as of that date, hit 88,067,088. America retains the dubious distinction as the country with the highest numbers of COVID-19 deaths and cases.

COVID-19 deaths worldwide totaled 6,342,296 on July 6, according to Johns Hopkins. Cases across the globe have climbed to 551,277,894.

Roughly 77.8% of the U.S. population, or 259,957,415, have obtained at least one dose of a COVID-19 vaccine, as of July 5, the CDC reported. Fully vaccinated people total 222,271,398, or 66.9%, of America’s population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to 106.3 million people.

The seven aerospace and defense investments to buy are intended to profit from rising inflation, increased grain prices and other economic factors. Despite the market’s volatility, the highest inflation in 41 years, the Fed’s plan for further interest rate hikes this month and increasing federal deficits, investors still may find the seven aerospace and defense stocks to help protect personal portfolios.

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, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is 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. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for multiple-book pricing.

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