Defense stocks to consider amid war in Ukraine position investors to profit from companies supporting international efforts to protect civilians and essential infrastructure from Russia’s ongoing invasion of Ukraine.
The defense stocks help the United States and its allies in preparing to fend off threats not only from Russia but from China, too. As the world’s most populous country with the second-largest economy, China recently has been described by top U.S. government officials as America’s biggest military and economic threat, requiring new defense and national security strategies.
The inflow of investment dollars to defense stocks as a means of portfolio protection against large declines in the broader market and the technology sector sell-off has been a major catalyst for “rerating in the sector,” according to BofA Global Research. Defense stocks have been fueled by strong support from the U.S. government amid one of the most “geopolitically tense environments” in recent years, BofA added.
Reinvestments in R&D Strengthen Defense Stocks to Consider Amid War
In the United States, defense spending has been rising steadily for the last 15 years, to the benefit of both publicly traded and privately held companies. The advent of digital technologies, such as advanced metal manufacturing and robotics, has cut production costs and sped up project completion, according to BofA.
In addition, major investments in research and development (R&D) have allowed defense companies to vertically integrate to gain increased control of their own supply chains. Increased R&D by large defense prime contractors also is fortified by funding from the U.S Department of Defense (DoD).
Skousen Assesses Defense Stocks to Consider Amid War
Mark Skousen, the head of the Forecasts & Strategies investment newsletter and a leader of the Fast Money Alert trading service that invests in both stocks and options, questioned SpaceX and Tesla (NASDAQ: TSLA) founder Elon Musk at the annual Baron Investment Conference held in New York on Nov. 4. Skousen, who also is a Chapman University Presidential Fellow and recently was named the first Doti-Spogli Chair in Free Enterprise at its Argyros School of Business and Economics, now is avoiding Tesla largely due to the stock’s sky-high valuation, even though he has recommended it profitably in previous years.
Mark Skousen, a scion of Ben Franklin and head of Fast Money Alert, meets Paul Dykewicz.
Jim Woods, a seasoned investment guru, also is the leader of the Bullseye Stock Trader advisory service that recommends stocks and options. Woods, who concurrently heads the Intelligence Report investment newsletter, is a former Army paratrooper who has strategically invested in defense stocks. In fact, he recently recommended the stock and options in one of the traditional defense stocks.
Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.
Skousen and Woods team up on the Fast Money Alert trading service, and they combined to produce a short-term gain of nearly 10% with their Oct. 3 recommendation of defense, space and cyber consulting firm Booz Allen Hamilton (NYSE: BAH), of McLean, Virginia. The call options they recommended zoomed 239.27% in just 28 days before they advised selling.
CACI International Is One of the Defense Stocks to Consider Amid War
One of the defense stocks that looks to have room to rise further is CACI International Inc. (NYSE: CACI), a defense and cyber contractor in Reston, Virginia. BofA placed a $380 price objective on CACI, well above its current share price.
CACI’s capital deployment strategy, including opportunistic share repurchases, offsets the discount related to the company’s lack of dividend payout, unlike its defense industry peers. Plus, the company continues to execute its contract strategy, disciplined approach to mergers and acquisitions (M&A) and its DoD priorities, BofA added.
Risks faced by CACI include any potential cuts to the DoD budget compared to expectations, as well as problems finding acquisition candidates. Further risks are integrating M&A, hiring the right personnel, containing costs, estimating costs and executing on fixed price contracts, as well as incurring reputational risk, BofA opined.
Outperformance could come from better-than-expected federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated M&A activity, unexpected capital return to shareholders through dividends, market share gains in the mission technology arena and enhanced margin expansion, according to BofA.
Chart courtesy of www.stockcharts.com
Defense Stocks to Consider Amid War Include Leidos Holdings
Another of the defense stocks to assess for investment is Leidos Holdings (NYSE: LDOS), also based in Reston, Virginia. Formerly known as Science Applications International Corporation, the company is involved in U.S. defense, aviation, information technology and biomedical research, providing scientific, engineering, systems integration and technical services.
BofA set a price target of $130 on Leidos, with a view that the company should trade in line with the defense prime contractors amid strong U.S. national security demand for innovative technologies and solutions. Other pluses are the company’s solid free cash flow, offset by a lumpy contract award environment, near-term supply chain pressures and mounting concerns about labor inflation.
Risks to attaining the price target are cuts to the U.S. government budget compared to expectations, increased competition from non-traditional competitors, problems integrating M&A, hiring the right personnel, containing costs, estimating costs and executing on fixed price contracts, as well as sustaining reputational risk and future awards.
Potential outperformance could come from a better-than-anticipated federal budget allocated to innovative technologies and modernization, inexpensive and well integrated M&A activity, unexpected capital return to shareholders in the form of dividends or share buybacks, market share gains, along with better-than-expected margin expansion, BofA wrote.
Chart courtesy of www.stockcharts.com
Michelle O’Connell, who leads Dallas-based Portia Capital Management, recommends Leidos as a strong mid-cap defense stock that is not covered as prominently as the large-cap stocks in the industry. The company has a large domestic customer base that produces 90% of its revenues.
Leidos serves the DoD, U.S. intelligence agencies, Department of Homeland Security and the Department of Veteran Affairs. With foreign government revenues currently accounting for less than 10% of the company’s total sales, that segment of the business could present “a great opportunity,” Connell counseled. The United Kingdom, Germany and other NATO allies are looking at improving their military intelligence and cyber security.
Strong consistent cash-flow generation during the last 10 years has reached at least $500 billion, Connell continued. To fuel future growth, Leidos spent more than $700 million for capital expenditures in 2021. Given the emphasis on cyber warfare, the timing of this investment is opportunistic.
Connell calculated recent contract wins in December 2022 of $102 million for the U.S. Army and $39 million for the U.S. Air Force. She gives the stock an upside potential of 15%.
Defense Stocks to Consider Amid War Feature Teledyne
Teledyne Technologies Incorporated (NYSE:TDY), of Thousand Oaks, California, is another of the defense stocks to consider amid the current war in Ukraine. One of its business units gained an award for 500 additional robots requested by the U.S. Army and Navy.
Teledyne FLIR Defense, part of Teledyne Technologies Inc., announced that it has received new orders worth $62.1 million from the U.S. Armed Services for its advanced, multi-mission robots. The U.S. Army, Navy, and other command centers placed orders for nearly 500 more Centaur unmanned ground systems (UGS), including additional spares, antennas and payload mounting kits.The award raises the value of the original Man Transportable Robot System Increment II (MTRS Inc. II) contract from roughly $190 million to more than $250 million.
Explosive Ordnance Disposal (EOD) teams use the Teledyne FLIR Centaur ground robot to disable unexploded ordnance (UXO), improvised explosive devices (IEDs) and landmines, as well as perform other dangerous tasks. Operators can quickly attach different sensors and payloads to the robot to address additional dangerous missions, including chemical, biological, radiological and nuclear (CBRN) threats.
In 2017, the Army chose Centaur as its MTRS Inc. II solution for a multi-year program. Since then, other U.S. military branches have opted to deploy Centaur to their EOD units as a new or replacement ground robot system. Orders totaling more than 1,800 Centaurs have come from the Army, Navy, Air Force and Marine Corps since 2020.
Robots Become a Vital Way to Protect People from Becoming Combat Casualties
Teledyne’s Centaur platform has proven to provide versatile and sought after tactical Unmanned Ground Vehicles (UGVs) to support America’s military, said Tom Frost, general manager of Unmanned Ground Systems at Teledyne FLIR Defense. The robots can substitute for U.S. or allied warfighters on risky and sometimes deadly missions.
Centaur also can be used effectively for UXO clearance in hotspots such as Ukraine, Frost said. With global security threats on the rise, allied nations can leverage this multi-purpose robot to support a wide array of manned and unmanned operations, Frost added.
The Teledyne FLIR Centaur is a medium-sized UGV that provides a standoff capability to detect, confirm, identify, and dispose of hazards. Weighing roughly 160 pounds, the Interoperability Protocol (IOP) robot features an advanced camera, a manipulator arm that reaches six-plus feet and stair-climbing capability.
Chart courtesy of www.stockcharts.com
The Teledyne FLIR business unit is a world leader in intelligent sensing, unmanned systems and integrated solutions for defense and industrial markets, with roughly 4,000 employees worldwide. Founded in 1978, the company develops a wide range of advanced technologies.
Its parent company, Teledyne Technologies, provides sophisticated digital imaging products and software, instrumentation, aerospace and defense electronics and engineered systems. Teledyne’s operations are primarily located in the United States, the United Kingdom, Canada and Western and Northern Europe.
BofA placed an $647 price target on Teledyne. Risks to achieving that objective include problems integrating FLIR, another downturn in industrials. a significant decline in the DoD budget and an exogenous event that prevents international sales, the investment firm opined.
General Dynamics Is Among Defense Stocks to Consider Amid War
General Dynamics (NYSE: GD), a global aerospace and defense company based in Reston, Virginia, is another recommendation of BofA, as well as stock picker Jim Woods for his monthly Intelligence Report investment newsletter. The company produces combat vehicles, nuclear-powered submarines and communications systems to provide safety and security.
Plus, the company’s defense program exposure to land and sea priorities, coupled with its Gulfstream business jet manufacturing segment, could spur near-term and medium-term organic growth. General Dynamics also has a strong balance sheet and solid cash generation, aiding dividend growth and share repurchases, BofA added.
BofA set a price objective of $325 on General Dynamics, noting it faces risks. On the defense side of its business, the risks include possible poor execution on defense programs hurting margins and any U.S. Defense Department budget cutting medium- and long-term growth. General Dynamics rose 21.40% in 2022 but BofA expects further gains in 2023.
Chart courtesy of www.stockcharts.com
Raytheon Rates as One of the Defense Stocks to Consider Amid War
Raytheon Technologies Corp. (NYSE: RTX), of Waltham, Massachusetts, is yet one more buy recommendation among defense stocks followed by BofA. The multinational aerospace and defense conglomerate is one of the largest aerospace, intelligence services and defense manufacturing providers in the world, based on revenue and market capitalization.
BofA gave Raytheon a price target of $120, based partly on a blend of U.S. defense and global commercial aerospace growth. Risks to attaining that price objective are a potential downturn in commercial aviation due to the natural business cycle or an exogenous event such as a terrorist attack or a renewed pandemic threat. A severe global economic slowdown would affect top-line growth, since 45% of sales are generated outside the United States.
Execution risk on defense programs could result in cost overruns and margin contractions, BofA added. Orders from international programs are difficult to time due to the complexity of the process. Thus, lumpiness could occur with international orders. Another blow could come from unexpected cancellations to military or commercial programs.
Outperformance could come from commercial aerospace and business aviation jet recoveries or earnings beating projections, BofA wrote. If margins fare better than forecast, there could be upside potential to the investment firm’s valuation of Raytheon. If the company executes on existing programs better than expected, gains share in the international market or makes a materially accretive acquisition, the reward could be better-than-anticipated upside in the shares, BofA wrote.
Despite the market falling overall in 2022, Raytheon rose 19.33% for the full year and has the potential to climb further in 2023.
Chart courtesy of www.stockcharts.com
China’s COVID Cases Climb Steeply After Relaxing Zero-Tolerance Policy
The number of COVID-19 cases has reached a record high in mainland China, peaking on Dec. 2, according to the European Centre for Disease Prevention and Control (ECDC). In the past three weeks, the number of cases in China has fallen, likely also due to the conducting of a reduced number of tests to detect cases.
The U.S. government will require mandatory negative tests starting Thursday, Jan. 5, for all passengers seeking to enter the country from China, after the latter country reported a spike in COVID-19 cases last month. France and several other countries also mandated clean COVID-19 tests for passengers arriving from China, reflecting global concern that new variants could emerge in the ongoing outbreak.
China has been accused of a lack of transparency since the virus emerged in late 2019. The worry is that China may not be sharing data about any evolving strains that could spark fresh outbreaks in other countries.
Along with the United States, Japan, India, South Korea, Taiwan and Italy have announced passengers from China would need to test negative for COVID. An internal meeting of China’s National Health Commission estimated that up to 248 million people contracted the coronavirus over the first 20 days of December. COVID-19 is roaring through cities in China after its government recently chose to ease its strict anti-virus controls.
China’s leaders reconsidered their zero-tolerance policy for COVID cases that had been in effect the last three years. Large protests in many of China’s cities in November 2022 may have convinced the nation’s leaders to modify the policy of strictly locking down communities where COVID outbreaks occurred.
China’s economy may gain a short-term boost from relaxing its COVID-19-related lockdowns, but a spike in cases and deaths could cause shutdowns to be ordered again by government leaders. Lockdowns cut the supply of goods and prevent many people from working, shopping and obtaining food and water without assistance. A real estate slump also may ensue.
U.S. COVID Cases Exceed 100.8 Million
COVID-19 cases in the United States totaled 100,843,810, while deaths reached 1,093,028, as of Jan. 3, according to Johns Hopkins University. Until recent news that estimated China had 248 million cases of COVID-19, America had the dreaded distinction as the nation with the most coronavirus cases and deaths. Worldwide COVID-19 deaths soared to 6,693,965 people, with total cases of 661,642,654, Johns Hopkins announced on Jan. 3.
The U.S. Centers for Disease Control and Prevention reported that 268,363,272 people, or 80.8% the U.S. population, have received at least one dose of a COVID-19 vaccine, as of Dec. 28. People who have completed the primary COVID-19 doses totaled 229,135,170 of the U.S. population, or 69%, according to the CDC. The United States also has given a bivalent COVID-19 booster to 44,711,483 people who are age 18 and up, equaling 17.3% as of Dec.28, rising from 16.8% last week, up from 16.3% the prior week and jumping from 15.5% the week before that one.
Ukraine’s President Volodymyr Zelensky’s secret Dec. 21 flight to Washington, D.C., allowed him to meet with U.S. President Joe Biden. Zelensky also addressed a joint session of Congress that evening. Zelensky’s surprise visit marked his first international trip since Russia’s invasion. The trip required Zelensky to travel by train to Poland, where he boarded a U.S. military aircraft to fly to America. He took the trip to rally support for additional funding for Ukraine’s defense from Russia’s unrelenting aggression.
Russia launched 16 so-called “kamikaze” drones into Ukraine under the cover of darkness early Friday morning, Dec. 30, a day after firing dozens of missiles at civilian targets, power plants and other critical infrastructure. They mark the latest attacks against Ukraine that have left roughly 10 million people there in darkness without heat or electricity amid frigid winter weather.
At least 76 missiles also were launched by Russia at major Ukrainian cities, including Kyiv, Odesa, Poltava, Zhytomyr, Kharkiv and Sumy, on Friday, Dec. 16, according to the Ukrainian Air Force. Russia is continuing its onslaught of intensified strikes that began in October, targeting Ukraine’s energy and civilian infrastructure.
Defense stocks to consider amid war in Ukraine include companies that are supplying the United States and its allies with a variety of equipment that largely is proving effective in countering Russia’s attacks. With Russia showing no sign of withdrawing to its original borders with its pre-2014 borders with Ukraine, demand should remain high for the kinds of products and services provided by the defense stocks that investors should consider amid war.
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. Special Holiday Offer: Paul 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 uplifting book is great 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 special pricing on multiple-book purchases.