Three Defense Stocks to Consider Buying During Russia’s War

Three defense stocks to consider buying as Russia continues to wage war in Ukraine feature the industry’s giants.

The three defense stocks to consider purchasing amid persistent attacks of residential areas in Ukraine could find increased demand for their products as many countries likely will need to rebuild their supply of military hardware after providing weapons to help repel the invasion ordered by Russia’s President Vladimir Putin. Any initial thoughts that the invasion of Ukraine would produce a quick victory for Russia have proven incorrect as both sides have used sophisticated and expensive weaponry.

Political risk is rising as Russia’s ruble has fallen in value to less than 100 to one U.S. dollar. The result is that Russia’s ruble has sunk in value to less than a penny.

To stop the ruble’s retreat, the governing board of Russia’s central bank held an emergency meeting to boost interest rates by 3.5% on Tuesday, Aug. 15. That move raised the interest rate to 12%, as the central bank seeks to prop up the devalued ruble that has been hit by economic sanctions from the United States, the European Union, Canada and many other countries.

Russia is further isolating itself diplomatically with the brazen killing of Ukrainian civilians who have no role in the war other than becoming victims. For example, street musicians Svitlana Siemieikina, 18, and Kristina Spitsyna, 21, were killed by a Russian airstrike on a residential community in Zaporizhzhia last week. Seven civilians, including a family of four with a 12-year-old boy and a 23-day-old baby girl, were killed when Russian forces shelled Ukraine’s southern Kherson region on Sunday, Aug. 13, the country’s Internal Affairs Ministry announced.

Three Defense Stocks to Consider: General Dynamics (NYSE: GD)

General Dynamics, a global aerospace and defense company based in Reston, Virginia, is a “buy” recommendation of BofA Global Research. The stock also is a favorite of seasoned stock picker Jim Woods in his monthly Intelligence Report investment newsletter. The company produces combat vehicles, nuclear-powered submarines and communications systems to provide safety and security.

Paul Dykewicz interviews former U.S. Army paratrooper Jim Woods.

Plus, the company’s defense program provides exposure to the military’s land and sea priorities, coupled with its Gulfstream business jet manufacturing segment, seeking to spur near-term and medium-term organic growth. General Dynamics also has a strong balance sheet and solid cash generation, allowing it to boost dividend payouts and share repurchases.

Further good news is that General Dynamics won a $500 million contract to manufacture 120mn ammunition. BofA expects the restocking trend to continue as the DoD looks to replenish munitions sent to Ukraine, as well as build reserves due to the ongoing war.

BofA set a price objective of $325 a share on General Dynamics, noting the company faces threats. On the defense side of its business, the risks include any U.S. Department of Defense budget cutting and potential problems in fulfilling federal contracts that could hurt the company’s profit margins, BofA added.

Chart courtesy of www.stockcharts.com

Three Defense Stocks to Consider: Lockheed Martin (NYSE: LMT)

Bethesda, Maryland-based Lockheed Martin (NYSE: LMT), a global security and aerospace company, showed resilience after negative media coverage about the company when it reported its fiscal second quarter results in July 2023. A key concern stems from a slowdown in F-35 delivery/revenue due to lower short-term demand from the Air Force and some certification issues.

“Also plaguing the company is the flatness of LMT’s current revenue stream,” said Michelle Connell, who heads Dallas-based Portia Capital.

Michelle Connell heads Portia Capital.

However, when Lockheed Martin’s earnings were announced, the book-to-bill ratio for the missile and missile defense system segment grew by 24% to a ratio of 3.3 times, Connell commented. In the defense industry, it takes time to realize revenue after it is booked, or the order is taken, she added.

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Lockheed Martin’s management has announced that 2023 would be a transition year, and the statement appears to be accurate, Connell told me. The current hot spot for LMT is the space segment, she added.

Connell, who said she views Lockheed Martin as a stock to own after its steep pullback since April, cited the company’s 12% growth year over year for its fiscal second quarter ended June 25, with revenues of $341 million. The company has “strong fundamentals” with a weighted average cost of capital of just 6% and a return on invested capital of 16%, she added.

Lockheed Martin’s dividend yield currently is 2.64%. In the last three years, its dividend has grown more than 8%.

The company’s management raised guidance in July for sales and profits. For the year, earnings are expected to increase 2%, but earnings per share (EPS) is expected to climb 23%. The difference is coming from continued share repurchases, she added.

Year-to-date, the stock is down, but if the market rotates out of technology and into other sectors, expect LMT to gain investor interest, Connell counseled.

“As we move into 2024, I think the upside could be as much as 20%,” Connell predicted.

Three Defense Stocks to Consider: Raytheon Technologies (NYSE: RTX)

Raytheon Technologies (NYSE: RTX), an Arlington, Virginia-based multinational aerospace and defense company that provides advanced systems and services for commercial, military and government customers worldwide, also is another BofA recommendation in the defense industry. RTX is in the midst of consolidating its defense business through its Raytheon Intelligence & Space and Raytheon Missiles & Defense units.

In a further sign of transition, Raytheon moved its headquarters in 2022 to Arlington, Virginia, near the decision-makers at the Pentagon, from Waltham, Massachusetts. Raytheon’s management is forecasting $200-300 million in cost synergies and plans to reduce intercompany sales between those business units by $1.4 billion.

While this may materialize, BofA’s aerospace and defense analyst Ron Epstein opined that the combination of those business units could reduce clarity into RTX’s defense business, which has been the subject of investor scrutiny in recent quarters due to disappointing sales and margins. 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.

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Aside from Raytheon Intelligence & Space and Raytheon Missiles & Defense, the parent company also operates Collins Aerospace and Pratt & Whitney, Raytheon Intelligence & Space and Raytheon Missiles & Defense. The company aims to provide solutions that push the boundaries in avionics, cybersecurity, directed energy, electric propulsion, hypersonics and quantum physics. In 2020, the parent organization combined Raytheon Company and the United Technologies Corporation aerospace businesses.

A key defense product offered by Raytheon is its Patriot missile system, a shortened version of its full name of Phased Array Tracking Radar to Intercept On Target. Built by Raytheon, the Patriot system ironically fires missiles made by Lockheed Martin.

Three Defense Stocks to Consider Gain Investor Attention Amid War

Think of Patriot publicity as offering bullish “NewsQ,” i.e., information that can lift a stock, Woods wrote in his Intelligence Report investment newsletter. Such news can help drive share prices higher in 2023, Woods added.

On Aug. 10, RTX announced that its BBN division received a contract award to support the Defense Advanced Research Projects Agency (DARPA), a research and development agency of the U.S. Department of Defense (DoD) that is responsible for the development of emerging technologies used by the U.S. military. The initiative is aimed at supporting DARPA’s “In The Moment” program that develops foundations needed for algorithms to make independent decisions in mass casualty triage and disaster relief when there often is no human consensus and no clear correct answer.

The goal is for artificial intelligence (AI) to provide the correct answer in “very controlled scenarios,” said Alice Leung, Raytheon BBN’s principal investigator. The intent is to create AI systems that humans would let make decisions independently in uncontrolled environments, she added.

The Raytheon BBN-led team, which includes Kairos Research, MacroCognition and Valkyries Austere Medical Solutions, will use a cognitive interviewing technique to understand how experts, such as medical professionals and first responders, assess information and make trade-offs to act decisively at critical times. This qualitative information will be used to design scenario-based experiments to study how different individual decision-making attributes can explain choices. How the attributes of two different people can affect their willingness to delegate decisions also will be studied. A goal will be to enable AI to match an expert population, or even an individual expert.

Three Defense Stocks to Look Toward Space

RTX’s space capabilities gained attention with the company’s Aug. 14 report that its small-satellite manufacturer and mission services provider, Lafayette, Colorado-based Blue Canyon Technologies (BCT), successfully launched and established initial contact with four 6U CubeSats for the NASA Starling mission. The mission features a technology demonstration aimed at proving that spacecraft can operate in an autonomous, synchronous manner or “swarm.”

The Starling mission is intended to advance the readiness of technologies for cooperative groups of spacecraft, demonstrating multipoint science data collection by several small spacecraft flying together. The six-month mission will specifically test onboard swarm maneuver planning and execution, communications networking, relative navigation and autonomous coordination between satellites.

Investors who are concerned about the market’s recent drop may find defense stocks offer a way to invest in dividend-paying equities that tend to be cushioned from the worst of pullbacks due to strong support from government spending. The three defense stocks to consider may prove to be well worth buying for investors who have a long-term horizon.

Paul Dykewicz, www.pauldykewicz.com, is an award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Crain Communications, Seeking Alpha, Guru Focus and other publications and websites. Paul can be followed on Twitter @PaulDykewicz, and is the editor and a columnist at StockInvestor.com and DividendInvestor.com. He also serves as editorial director of Eagle Financial Publications in Washington, D.C. In that role, he edits monthly investment newsletters, time-sensitive trading alerts, free weekly e-letters and other reports. Previously, Paul served as business editor and a columnist at Baltimore’s Daily Record newspaper and as a reporter at the Baltimore Business Journal. Plus, 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 endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many other sports figures. To buy signed and specially dedicated copies, call 202-677-4457.