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With defense spending ramping up in the U.S. and EU, is now a good time to buy defense stocks, and if so, which ones?
In a recent SA readers’ survey, 51.4% of the 979 participants agreed that now was the time to buy, with 48.6% disagreeing.
We asked Seeking Alpha analysts Eliana Scialabba, Hawkinvest, Leo Nelissen and Dividend and Value Investor to weigh on whether the time was right to invest in the defense sector and which stocks looked most attractive.
Defense spending is on the upswing, particularly in the U.S. and Europe. Is now a good time to buy defense stocks?
Eliana Scialabba: We are at a very particular moment for the defense sector: the international context pushes governments to strengthen budgets, and this translates into a sustained demand for technology and services. Although the valuations of companies such as Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and General Dynamics (NYSE:GD) are slightly higher than the historical average, the solidity of their long-term contracts and the growth of the backlog make them remain attractive options.
I also recently improved my view on RTX (NYSE:RTX) because it showed concrete progress in its operation and margin recovery. Ultimately, for those looking for defensive exposure and appreciation potential, I think the sector still offers a good opportunity.
Hawkinvest: I like the defense sector in the long run, but in the short run, I would be very selective and cautious. The market in general and the defense sector are overbought and extended well above key moving averages, so I would wait for pullbacks in most cases. For example, the Invesco Aerospace & Defense ETF (PPA) traded below $100 during the market pullback in April, but it is up about 50% from those lows and now trading around at $146. I wrote bullish articles on RTX Corporation (NYSE:RTX) and Boeing (NYSE:BA) when they were both facing challenges, but both of those stocks are up significantly since then, and I believe the easy money has been made in those stocks for now.
Leo Nelissen: Yes and no. Yes, because we are in a secular uptrend fueled by depleted stockpiles of next-gen missiles, years of underwhelming investments in defense equipment, and because nations in Europe depend on defense spending to support economic growth. No, because a lot of good news has been priced in already. For example, the German Rheinmetall (OTCPK:RNMBF) is trading at nearly 100x earnings, a bit lofty for my taste.
Dividend and Value Investor: I believe the market has already priced in much of the potential upside, and it is generally advisable to be cautious when investing in an increasingly broadly covered investment theme. It should also be borne in mind that only part of the announced spending will find its way down to the bottom line of defense companies, largely due to the bureaucracy expansion involved.
Good sector-wide performance is also the reason why I do not invest in defense-oriented ETFs (or similar investment instruments) but instead focus on individual stocks. When paying attention not only to quality but also valuation, it is still possible to find reasonable deals despite what looks like an increasingly crowded trade (especially with regard to German defense stocks).
What are the most attractive U.S. defense or defense-related stocks right now?
Eliana Scialabba: Personally, I still like the combination of Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) for their diversification into key programs and track record. However, if I had to choose a “new story,” RTX (RTX) seems particularly interesting. After overcoming operational problems and showing a solid Q2, RTX now offers more reasonable valuations, a record backlog, and renewed exposure to critical segments such as missiles and air defense. For investors with a slightly more innovative profile, Palantir (NASDAQ:PLTR) and AeroVironment (NASDAQ:AVAV) also excel in growth niches linked to AI and drones.
Hawkinvest: Even though this sector is generally overbought, I do see attractive buying opportunities with two stocks that have recently declined after earnings, Lockheed Martin (LMT) and Textron (NYSE:TXT), although I would not buy a full position right away. I would average into those names in case there’s additional weakness. Textron (NYSE:TXT) shares ran up just before earnings, so even though it reported solid results, the stock gave back some gains, and it now trades at a key support level, the 200-day moving average.
As for Lockheed Martin (LMT), investors did not like Q2 results because of a $1.6 billion charge. However, I view that as a one-time issue and feel that investors should look past the quarter and focus on the potentially large opportunity this company has with increasing European defense spending and the “Golden Dome” project. Lockheed Martin appears very well-positioned for this project thanks to its THAAD missile interceptor system and radar systems.
I prefer to buy stocks when there are setbacks, as was the case with RTX (RTX) and Boeing (NYSE:BA) in the past, and now I think it makes sense to buy the recent “setback” in Lockheed Martin (LMT).
Leo Nelissen: To me, the most attractive ones are the companies with the best protection against disruptors, support from commercial operations, and/or exposure to fast-growing programs. Among large players, this includes L3Harris Technologies (NYSE:LHX), RTX Corp. (RTX), GE Aerospace (NYSE:GE) and Northrop Grumman (NOC).
Dividend and Value Investor: Leaving valuation aside, I maintain that RTX (RTX) is a very high quality company with a balanced exposure to defense and commercial aviation.
When looking for a reasonable balance between quality and value, Lockheed Martin (LMT) stock comes to mind. Admittedly, as a pure-play defense company (in view of increasingly strained government budgets) and due to ongoing challenges (weak guidance, cost overruns, program losses), it is riskier than RTX, but the market has priced the stock accordingly. I continue to view Lockheed’s long-term position, largely hinged on its F-35 franchise, as very solid and the company as capable of delivering solid returns on capital over several decades.
What are the most attractive foreign defense or defense-related stocks right now?
Eliana Scialabba: Outside the U.S., it is difficult for me not to mention BAE Systems (OTCPK:BAESY). It is well positioned in both the European and U.S. markets, and is one of those that has adapted more quickly to the demand for advanced technology. Elbit Systems (NASDAQ:ESLT) is growing very strongly in unmanned systems, and Leonardo (OTCPK:FINMY) shows an interesting recovery thanks to the European demand for military equipment. Saab (OTCPK:SAABF) is also worth a look, especially for those seeking exposure to state-of-the-art combat platforms and radar technology. Overall, prices have risen, but there is still value by scale and long-term contracts.
Hawkinvest: European, Israeli and other foreign defense stocks have generally seen massive gains due to increased defense spending from NATO and the impact of continued military action in a number of global hotpots. So, a lot of good news is already priced into these stocks. I would look at Elbit Systems (NASDAQ:ESLT) and Thales (OTCPK:THLEF) as potential buys if there is a significant pullback.
Leo Nelissen: In Europe, I prefer MTU Aero Engines (OTCPK:MTUAY), a German-based engine giant that maintains and develops modern defense and commercial engines. It is working on next-gen defense programs and partners with international companies like RTX (RTX).
Dividend and Value Investor: The unprecedented short-term returns of European defense companies such as Rheinmetall (OTCPK:RNMBF) (OTCPK:RNMBY) make me rather cautious, as does the risk of reallocation of defense-earmarked capital, both intentional and unintentional, by governments. In this context, recall the EU’s €750 billion recovery package, Next Generation EU, adopted in late 2020.
Although France is currently facing serious challenges, I consider Dassault Aviation (OTCPK:DUAVF) to be a company with solid operations and a still somewhat reasonably valued stock. I like the broad diversification in defense, including through its stake in Thales (OTCPK:THLEF) (OTCPK:THLLY), and I appreciate the fact that Dassault is present in the commercial aviation sector with its Falcon line of business jets (similar to General Dynamics (NYSE:GD) with its Gulfstream jets).
Which “up-and-coming” defense/defense-related companies should investors be watching in 2025?
Eliana Scialabba: If I think of emerging names, Kratos Defense (NASDAQ:KTOS) is one of the most interesting cases for its focus on autonomous solutions and new generation drones. Mercury Systems (NASDAQ:MRCY) is growing strong in the secure electronics niche, fundamental to any modern conflict. Palantir (NASDAQ:PLTR), which I already mentioned, continues to surprise by how it brings AI to military operations, and AeroVironment (NASDAQ:AVAV) is very well positioned to take advantage of the global trend towards unmanned systems. They are smaller and somewhat more volatile, but I think the long-term growth potential is real.
Hawkinvest: I believe drones and the Golden Dome project are the up-and-coming segments of the defense sector that investors should be watching in 2025. I am watching a couple of companies that are in the drone industry, Ondas Holdings (NASDAQ:ONDS) and Red Cat Holdings (NASDAQ:RCAT), but I would wait for pullbacks and/or some other positive fundamental developments before considering a buy on these stocks.
Leo Nelissen: I am watching Rocket Lab (NASDAQ:RKLB) as the only serious mini-SpaceX (SPACE) company; Anduril, which is still a private company with massive disruptive potential; and Joby Aviation (NYSE:JOBY) due to new partnerships with L3Harris and its ability to disrupt defense aerospace.
Dividend and Value Investor: Although L3Harris Technologies (NYSE:LHX) shares have performed solidly so far in 2025 and their valuation makes me cautious about increasing my position, I believe this “major defense contractor in the making” deserves special attention.
While its M&A-focused approach is certainly risky, I would argue that there is a clear line in the sand, and L3Harris is showing promising signs of becoming a major player with increasing bargaining power, offering a very diverse range of products and services in the areas of satellites, communications equipment, avionics, and, most recently, rocket engines.
The latter should position the company well in the context of the planned Golden Dome project, with potential for synergies in sensors and satellites, which should cement L3Harris’s (LHX) position as a major defense contractor. Despite the diverse product and service portfolio, management is doing a good job of maintaining the agility of the individual business units, as evidenced, for example, by strong profitability.