SA Asks: Which defense stocks are most attractive right now?

Despite ongoing conflicts in the Middle East and Ukraine, defense stocks have been a mixed bag in 2024.

So far this year, defense stocks have largely lagged the S&P 500. RTX (NYSE:RTX) and General Electric (GE) have been notable exceptions, with shares of RTX soaring 47% and General Electric 72% year-to-date, followed by Lockheed Martin (NYSE:LMT), which has seen a 25% gain. In comparison, the S&P 500 has risen 18%.

Defense-focused ETFs have also been mixed. Of the three largest ETFs, only Invesco Defense ETF (PPA) has beaten the S&P 500 this year, with shares up 23%. Two other standouts have been Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN), up 42% year-to-date, and Global X Defense Tech ETF (SHLD), which has gained 34%.

Which brings us to today’s SA Asks investment question: Which are the most attractive defense stocks right now?

We asked Seeking Alpha analysts Leo Nelissen, Jere Wang of JR Research, Deep Value Ideas and Dhierin Bechai to weigh in on the topic.

Leo Nelissen: The most attractive defense companies are the ones that focus on at least two things: advanced defense projects and international demand. The defense environment is rapidly changing, fueled by the war in Ukraine, which shows that the “war of the future” will be less dependent on hardware like tanks. Although I am bullish on the producer of the American Abrams tank, General Dynamics (NYSE:GD), I prefer to own companies working on next-gen projects, including advanced missile defense, space and aviation. Especially if companies have a focus on export sales to allies like European NATO members, I believe the next few years will be extremely lucrative, as NATO is looking to accelerate defense spending for many years to come.

JR Research’s Jere Wang: I prefer RTX (RTX), Lockheed Martin (LMT) and Northrop Grumman (NYSE:NOC). RTX offers a more diversified portfolio, including commercial aerospace, while LMT and NOC are more narrowly focused as prime defense contractors.

Deep Value Ideas: RTX (RTX) is handling the powdered metal issue really well and I expect the company to benefit greatly from its strategic position in the aircraft engine business through Pratt & Whitney for many decades to come. We shouldn’t underestimate the growth potential in that segment. With Northrop Grumman (NOC), I believe the market is still underestimating the impact of the B-21 Raider and Ground Based Strategic Deterrent/LGM-35 Sentinel programs on the company’s cash flow, as well as the much-improved long-term earnings visibility that will result.

Dhierin Bechai: I believe names such as Northrop Grumman (NOC), RTX (RTX), General Dynamics (GD) and Lockheed Martin (LMT) make for compelling core holdings in an aerospace and defense portfolio. I also believe that names outside of the U.S. such as Rheinmetall (OTCPK:RNMBF) and BAE Systems (OTCPK:BAESF) offer compelling investment opportunities on elevated defense budgets in Europe and ammunition demand. In the U.S., a smaller defense player such as Kratos (NASDAQ:KTOS) could be attractive. The company is expensive compared to its peer group, but its drone and propulsion portfolio could provide support to its results and subsequently stock prices.