U.S. Arms Manufacturers Stock Investment Guide: From Political Risks to Long-term Returns

In recent years, global regional conflicts have intensified, with the Russia-Ukraine war and turmoil in the Middle East, leading to annual increases in military spending by various countries. Behind this phenomenon reflects an investment opportunity: U.S. defense contractors' stocks are becoming a "defensive growth" in risk assets. Rather than viewing this as speculation, it is more about following national strategic allocations of capital.

Why should you pay attention to U.S. defense contractors' stocks now?

Traditional views consider defense stocks as cyclical industries, but in reality, that is not the case. In an era of increasing regional confrontation worldwide, military expenditure has become a long-term commitment by governments rather than a short-term budget. Historical data shows that even during the 2008 financial crisis and the 2020 pandemic, revenue fluctuations of pure defense companies were much smaller than the overall economy.

The logic behind this is simple: In an era of declining birthrates, replacing human labor with technology becomes an inevitable choice. Drones, precision missiles, information warfare systems—these new weapons' procurement demands will only increase, not decrease. When a country can accomplish tasks previously requiring 1,000 soldiers with just 10 drones, government procurement decisions become highly rational.

Stock selection logic for U.S. defense contractors

Before choosing specific targets, investors must understand a core concept: Not all companies involved in military-related fields are pure defense stocks.

Take Caterpillar as an example. Although labeled as a defense concept stock, its military revenue accounts for less than 30%, with its main business still being engineering machinery. The stock performance of such companies depends more on global infrastructure investment than on military expenditure. In contrast, companies like Lockheed Martin and Northrop Grumman have military orders accounting for over 80%, with their stock prices highly correlated with defense budgets—correlation coefficients above 0.9.

Therefore, when evaluating defense companies, it is essential to focus on the military revenue proportion, which is the primary indicator of whether the target aligns with your investment logic.

In-depth analysis of major U.S. defense stocks

Lockheed Martin (LMT): A steady defensive first move

Lockheed Martin maintains a global leadership position in tactical missiles and air defense systems. From a long-term chart perspective, the stock has shown a stair-step upward trend since listing, with most corrections caused by broader market adjustments rather than deteriorating fundamentals.

Its latest business layout revolves around "space defense," which is a key investment focus for the Pentagon over the next decade. The military upgrade of satellite communication systems alone is enough to generate a substantial flow of orders for the company.

Raytheon (RTX): Risks and opportunities coexist

Raytheon’s stock performance has been weak this year, often attributed to a slowdown in defense orders. However, the main issues stem from the civilian sector. Powder metal parts supplied to Airbus A320neo have shown fracture risks under high-pressure environments, leading to decreased confidence among airlines worldwide in this series of aircraft parts.

Estimates suggest that over the next 3 to 4 years, hundreds of aircraft may require re-inspection and maintenance, with repair cycles lasting hundreds of days. This not only erodes the company's profits but also exposes it to litigation risks. Although military orders are steadily growing, the drag from the civilian sector is enough to offset defense dividends. Therefore, Raytheon stock is currently in a "waiting for recovery" phase and not an optimal entry point.

Northrop Grumman (NOC): The most technically protected choice

As the world's largest radar manufacturer and the fourth-largest defense contractor, Northrop Grumman holds an absolute advantage in strategic deterrence technology. The company's business covers space, missile communication, and electronic warfare systems—areas that will be focal points of national defense investment over the next ten years.

Notably, the company has increased dividends for 18 consecutive years and has accelerated a $500 million share repurchase plan this year. This indicates management’s confidence in the company's future cash flow. In terms of moat depth, Northrop Grumman’s technological monopoly is very strong; new entrants almost cannot compete, making it a long-term investment value.

General Dynamics (GD): A model of steady cash flow

General Dynamics is one of the few U.S. defense contractors serving all three military branches—Navy, Army, and Air Force. Its unique structure involves non-pure defense business—its civilian sector mainly manufactures and maintains business jets, with a stable customer base and less sensitivity to economic cycles.

The company has maintained 32 years of consecutive dividend growth, a feat achieved by only about 30 listed U.S. companies. Even during the 2008 financial crisis and the 2020 pandemic, profits remained relatively stable. While revenue growth is not as rapid as pure defense companies, it has strong cost control, continuous profit margin improvement, and share repurchase plans that create value for shareholders.

Boeing (BA): Growth hampered by civilian sector issues

Boeing, as one of the global commercial aircraft duopolists, has military business covering bombers, transport aircraft, and helicopters. Its military orders are relatively stable, but the overall weak stock performance is mainly due to structural issues in the civilian market.

The 737 MAX incidents in 2018-2019 led to worldwide grounding, compounded by pandemic impacts, causing the company’s civilian sector to suffer long-term losses. A more severe challenge is the rapid rise of Chinese commercial aircraft manufacturers supported by government backing, which is eroding Boeing’s past market dominance. This means that even if military orders continue to grow, the decline in the civilian sector can drag down the overall stock price.

Opportunities in Taiwanese defense stocks

Taiwan is at the center of global geopolitical focus, with both sides increasing military expenditure. Local defense companies are experiencing a rare demand peak.

Thunder Tiger Technology has transformed from a remote-controlled model toy manufacturer into a drone supplier, with its stock price soaring significantly in 2022. As military demand continues to grow, the company's prospects are worth monitoring.

Hanchang combines defense and civilian businesses. Its military sector mainly produces trainer aircraft, while its civilian sector provides maintenance and parts sales. This diversified structure allows it to better disperse risks compared to companies like Raytheon and Boeing, which are heavily reliant on single products. The company's business is expanding with the growth of the drone market and the reopening of demand, making its stock performance relatively stable.

Three Moats of defense stock investment

From Buffett’s investment framework, defense stocks meet three key conditions:

Extremely long runway: Human conflicts have never ceased throughout history; military demand is permanent. This differs from industries like consumer electronics, which may face disruptive innovation. The fundamental demand for defense remains highly stable.

Deep moat: Defense technology originates from the most advanced national R&D; civilian technology often lags military applications by years. Due to national security concerns, industry entry barriers are extremely high, trust takes time to build, and many patents and technologies are exclusive. Leading companies are difficult to replace.

Wet snowball effect: Global regional confrontation trends mean that military expenditure is a long-term policy orientation. Unlike other economic cycle industries, the probability of a significant downturn in defense is very low—unless the world enters a period of complete peace—which is almost impossible in the foreseeable future.

Practical advice for investing in U.S. defense stocks

Step 1: Distinguish between pure defense and mixed companies. Pure defense companies (with over 80% military revenue) have stock prices strongly correlated with defense budgets and are suitable for long-term holding; mixed companies require attention to civilian market performance as well.

Step 2: Focus on industry structural changes. Future military demand will lean more toward high-tech fields (drones, missiles, space systems) rather than traditional soldier training. Therefore, investment should focus on aerospace and naval-related companies, as Army-related orders grow relatively slowly.

Step 3: Regularly review corporate governance. Continuous share buybacks and dividend increase plans reflect management’s confidence in future cash flows. Companies like Northrop Grumman and General Dynamics that insist on dividend growth usually have stronger risk resistance.

Step 4: Beware of civilian sector risks. Lessons from Raytheon and Boeing show that even if defense business is stable, problems in the civilian sector can destroy stock value. In investing, it is essential to thoroughly evaluate the prospects of non-defense markets.

Conclusion

U.S. defense contractor stocks represent a special investment opportunity: they are not growth stocks nor value stocks, but "policy-driven growth stocks" supported by geopolitical factors. When selecting targets, prioritize companies with high military revenue proportion, technological leadership, stable cash flow, and continuous dividend growth.

Before making investment decisions, it is necessary to comprehensively assess the company's defense order ratio, civilian market performance, technological competitiveness, and global political risks. Only companies with both stable defense orders and healthy civilian businesses can truly become core holdings in a long-term investment portfolio.