JHVEphoto
As armed conflicts in the Middle East and Ukraine continue to escalate, investors may be evaluating whether to move more money into defense stocks.
Despite the escalating tensions, defense stocks have had a mixed performance this year, with several well-known names lagging the S&P. 500. Which brings us to today’s question posed by SA: Which defense stock is the best short term investment right now?
We asked Seeking Alpha analysts Dhiren Pichai, JR Research’s Jerry Wang, and Deep Value Ideas’ Leo Nielsen to provide their picks.
Two monasteries were sold: In the short term, I think Saab AB (OTCPK:SAABF) presents an attractive investment opportunity. Of all the defense stocks I cover, it is one of two names that are currently undervalued relative to its peers and the average EV/EBITDA multiple. Another name that presents an upside opportunity is Hensoldt AG (OTCPK:HAGHY).
Jerry Wang from JR Research: I am evaluating Lockheed Martin (New York:LMT) as the most appropriate investment in defense in the short term. It is well exposed to the escalating geopolitical climate and resupply opportunities associated with the conflict between Russia and Ukraine. It is also expected to be the main beneficiary of expected increases in U.S. defense spending.
Leo Nelson: The near term is challenging, as the defense industry as a whole has benefited from a strong Q2 2024 performance and higher stock prices. Finally, most major defense contractors have shown strong revenue and earnings growth, often raising guidance. This has signaled to investors that supply chain and margin headwinds have faded.
However, I still love RTX (New York:RTX) and L3Harris Technologies (New York:LHXIn this market, I believe both companies have the potential to deliver 10-14% annual returns, with above-average short-term potential. L3Harris (LHX) is benefiting from major mergers and acquisitions, including the acquisition of Aerojet. This has made the company a giant in the rocket industry. Meanwhile, RTX (RTX) has favorable trade and defensive tailwinds, growing at its fastest pace since the pandemic.
In addition, the two companies enjoy strong demand from NATO member states in Europe, including missile defense and higher production rates for the F-35. The two companies are key suppliers for this project, including the engine and the latest technology upgrade.
Thoughts of deep value: Nothing. The market has priced in the current outlook for the companies I cover appropriately, and the short-term outlook is quite 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 (New York Stock Exchange: Night) due to the recently announced positive outcome of the Department of Defense’s review of cost overruns from the Ground-Based Strategic Deterrent Program. In this context, further positive news flow could send the stock higher. However, keep in mind the recent strong recovery in National Oil Company (NOC) stock.