Why You Should Consider Military Defense Stocks

History has shown, time and again, that defense stocks are one of the sure bets to protecting and growing wealth, no matter what the rest of the market is doing. 

The ugly fact of the matter is that we live in a world steeped in conflict. It’s been that way for all of human history. 

Whether conflicts are fought over borders, resources, or to beat back invasions, there’s always been a need for weapons and tools of war. So companies in the defense sector tend to be strong performers that can make up a solid cornerstone of an investor’s portfolio. 

Why You Should Consider Military Defense Stocks

This has been especially true for the past year or so. It could be said that there are few times in recent history where defense investing has been as lucrative.

But defense investing covers a wide range — so it pays to know the what and why in the sector before you start looking for the best ways to make money. 

Why Buy Defense Stocks Now

It goes without saying that a lot changed when Russia began its invasion of Ukraine earlier this year. Not only did this further destabilize markets that were already in rough shape, but it caused countries to reevaluate their priorities. 

Much has been said about supply chains and what countries do to secure things like precious metals and energy. Before the invasion began, Russia was a core part of the plan for many of these countries. Then, as the war raged on, we saw the Kremlin cut off gas supplies to some countries while others imposed sanctions that involved cutting off trade with Russia. The US and some western European countries have sold weapons to Ukraine so that it can defend itself against Russian aggression.

Not only did this affect trade between Russia and other countries, it also made those countries rethink just how much they spend on their own defense. 

No one knows exactly what Russia will do in retaliation, especially as the war drags on for longer than the Kremlin thought it would. That’s why you’re seeing countries close to Russia not take any chances. 

Poland has gone on a spending spree since the beginning of the war, buying ships, tanks, missiles, and drones to bolster its military. 

Sweden has taken a similar path. It wants to increase military spending to 2% of its GDP by 2026, with an emphasis on increasing personnel, cyber defense, and signals intelligence. 

In October, France added 3 billion pounds to its 2023 defense budget, bringing its spending up to 43.9 billion pounds. This is the country’s largest increase in almost 15 years. This increase will cover things like ammunition, missiles, and improved infrastructure. 

The UK, whose spending on an international scale is second only to the US, has also promised an increased military budget. It remains to be seen exactly what this would look like, but leadership has floated the idea of doubling spending. 

And all of this isn’t limited to just Europe. 

Allies throughout Asia are also reviewing just what they spend on their defense. 

Japan recently approved its biggest military buildup since World War II. This is in response to an increasing threat from China, which Japan has said poses the “greatest strategic challenge ever.” 

It’s no secret that China has been more assertive in the region in the last few years, and that has put countries like Japan and others throughout the region on high alert. Japan wants to make its defense spending 2% of its GDP, effectively doubling it from current levels. This would undo nearly 70 years of policy that kept spending at its current level, but the fear is that a potential Chinese invasion of Taiwan would threaten Japan’s security. 

Japan also has to consider threats from North Korea, which recently fired missiles capable of reaching the island in response to its increased security measures. 

North Korea’s belligerence has long been the main reason why South Korea has bolstered its military over the past few decades. From there, it expanded to being a weapons exporter. Since 2016, the country has doubled its weapons exports in a bid to become one of the world’s top weapons suppliers. In 2021, it sold $7 billion worth of weapons to European nations as well as American defense contractors who needed to fill orders to Ukraine and Taiwan. 

Here in the US, the Senate recently passed a bill authorizing a defense budget of $858 billion for 2023. The money in the bill will be used for weapons, ships, aircraft, and a pay raise for personnel. Heightened tensions with both China and Russia are some of the reasons for the increased spending. The US isn’t going to give up its status as the biggest spender for defense any time soon. 

So now you know why defense investing is looking at a long-term upward trend, but where should those investment dollars go? 

The uranium company you should know about

What Best Defense Stocks for 2023

When investing in defense companies, it often pays to go with the household names in the sector. 

These are companies that have been around for decades, their names going hand-in-hand with the industry. These types of companies get most of their revenue from the US government, a stable and reliable client. In turn, these companies have the longstanding expertise to deliver what the government needs, ensuring their continued longevity. 

It’s a small club, occupied by names like Lockheed Martin (NYSE: LMT). It provides fighter jets, solutions in electronic warfare, maritime systems, and integrated air and missile defense, just for starters. On top of all of that, the company offers training in all of these areas. Lockheed Martin has long been one of the best military stocks to buy because its contracts have long lifespans. That means recurring revenue and guaranteed work for decades on end. One of its flagship offerings is the F-35 fighter jet, which is set to remain in service until 2070. 

General Dynamics (NYSE: GD) is another stalwart name in the space. This company specializes in missile systems, tanks and armored combat land vehicles, and aircraft like the F-16 Fighting Falcon. It also offers a wide range of services related to information technology, which makes up over a third of its business. While GD does a lot of business with the US Department of Defense, it also conducts a lot of business with NATO. A few years ago, GD won a contract to modernize NATO’s IT infrastructure, and that came in handy when the Ukraine conflict began. As that conflict continues and new ones emerge, there will be plenty for GD to do. 

Raytheon (NYSE: RTX) is one of the largest military contractor stocks in the world. It offers a wide range of missile defense systems, with one of the most well-known being the Stinger. This portable surface-to-air missile launcher can be carried from a variety of vehicles and has been in service since the early 1980s. The Stinger has so far played an integral role in Ukraine’s defense against Russia, and Raytheon was awarded a large contract to make more to replenish the US’s supply. That’s just one aspect of its business. It also has segments for aircraft engines, cybersecurity, drones, and satellites among others. 

These are just three individual defense stocks to invest in, but you also have the option to put your money in ETFs so that you own part of several defense contractors at once. 

The iShares U.S. Aerospace & Defense ETF (ITA) is one. Through this ETF, you’d get exposure to some of the top companies in the sector, such as the three named above along with other giants like Boeing (NYSE: BA) and Northrop Grumman (NYSE: NOC)

There are also defense ETF stocks that focus on smaller, more growth-oriented mid-cap and small-cap companies like AeroVironment (NASDAQ: AVAV) and Kratos Defense & Security Solutions (NASDAQ: KTOS). Companies of that status have more runway to rise in value, thus potentially securing bigger gains for investors. If that’s appealing, then some ETFs to consider would be the ARK Space Exploration & Innovation ETF (ARKX) and the SPDR S&P Aerospace & Defense ETF (XAR).

The Risks of Defense Stock Investing

Like investing in any other sector, defense company stocks aren’t without risks. These types of investments are safe bets because most business comes from the US government, but public policy is often driven by public sentiment. 

As it stands right now, defense contractors are doing well largely because of the Ukraine conflict and heightened tensions with China. Many Americans, according to recent polling, favor continuing to support Ukraine. They also support defending Taiwan and other allies in east Asia against China if it comes to it. 

The unfortunate reality is that these conflicts and tensions are unlikely to go away any time soon, especially with China. Between the rising threat of military conflict and the recent push to secure critical elements like lithium without having to rely on China’s supply, our relationship with them is likely to remain strained for a long time. 

But that also means these defense stocks will have plenty of work to keep them busy. That makes them solid investments in a time when that’s becoming increasingly harder to come by. 

Ryan Stancil

Ryan Stancil
Editor, Daily Profit Cycle