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With armed conflicts in the Middle East and Ukraine continuing to escalate, investors may be evaluating whether to move more money into defense stocks.
Despite rising tensions, defense stock performance has been mixed this year, with many well-known names lagging the S&P 500. Which brings us to today’s SA Asks question: Which defense stock is the best short-term investment right now?
We asked Seeking Alpha analysts Dhierin Bechai, Jere Wang of JR Research, Leo Nelissen and Deep Value Ideas for their picks.
Dhierin Bechai: For the near-term, I believe Saab AB (OTCPK:SAABF) offers a compelling investment opportunity. Out of all the defense stocks I cover, it is one out of two names that currently is undervalued against peers and against its median EV/EBITDA multiple. The other name that presents upside is Hensoldt AG (OTCPK:HAGHY).
Jere Wang of JR Research: I assess Lockheed Martin (NYSE:LMT) as the most suitable short-term investment in defense. It’s well-exposed to the heightened geopolitical climate and resupply opportunities linked to the Russia/Ukraine conflict. It’s also expected to be a prime beneficiary of anticipated increases in US defense spending.
Leo Nelissen: The short term is tricky, as the defense industry, in general, just benefited from a strong Q2 2024 performance and rising stock prices. Most major defense contractors finally showed strong revenue and earnings growth, often hiking guidance. This signaled to investors that supply chain and margin headwinds have faded.
Nonetheless, I still like RTX (NYSE:RTX) and L3Harris Technologies (NYSE:LHX). In this market, I believe both these companies have the potential to return 10-14% per year, with above-average short-term potential. L3Harris (LHX) benefits from major M&A, including the takeover of Aerojet. This has made the company a giant in the missile industry. Meanwhile, RTX (RTX) has both commercial and defense tailwinds, growing at its fastest pace since the pandemic.
Moreover, both companies enjoy strong demand from European NATO members, including for missile defense and higher F-35 production rate. Both producers are key suppliers for this project, including the engine and the latest technology upgrade.
Deep Value Ideas: None. The market has adequately priced in the current expectations for the companies I cover and the short-term outlook is pretty clear. Of course, there may be unexpected positive surprises, but I think investors should focus on the long term rather than the short term at this point.
If I had to pick one stock, it would be Northrop Grumman (NYSE:NOC) due to the recently announced quite favorable outcome of the DoD’s review of cost overruns from the Ground Based Strategic Deterrent program. In this context, further positive news flow could lead to a pop. However, bear in mind the recent and strong rebound of NOC (NOC) stock.
