Recently, I’ve been looking at U.S. stocks and discovered an interesting investment direction—defense stocks. Over the past two years, geopolitical tensions have been getting increasingly tense; the Russia-Ukraine war and Middle Eastern conflicts have been happening frequently. Countries have begun to realize a problem: future wars will no longer rely on mass-troop tactics, but will be fought by competing on technology, drones, and information warfare. This has directly led to global military spending rising year after year, and many countries are increasing their defense spending.

When it comes to defense stocks, they are essentially companies that supply products and services to the military. The scope is broad, ranging from large weapon systems to smaller items such as military uniforms and water bottles. But the ones that truly capture the benefits of the defense industry are still those companies whose defense revenue makes up the bulk of their income. One key investment detail here is to look at how high a company’s defense segment share is. For example, pure defense contractors like Lockheed Martin (LMT) and Raytheon (RTX), where defense revenue accounts for more than 80%, are the real defense stocks. Meanwhile, semi-military, semi-civilian companies such as Boeing and General Dynamics also have defense business, but their civilian share is larger, so their stock price fluctuations are more influenced by the civilian market.

Let me first name a few noteworthy targets. Lockheed Martin is the world’s largest defense contractor. It mainly produces aircraft components and missiles, and well-known weapons such as the F-35, F-16, and Black Hawk helicopters all come from them. In the Russia-Ukraine war, drones have performed remarkably well, directly driving an increase in this company’s orders, and its stock price has risen accordingly. From a long-term perspective, LMT has stable cash flow and decent dividends, making it a defense industry leader suitable for long-term holding.

Next is Raytheon (RTX), the second-largest weapons supplier for the U.S. Department of Defense. It specializes in various missiles and intelligence services. However, this company has had a rough few years. In 2023, its stock price fell all the way down, mainly because quality issues were found with the Pratt aircraft engines under its umbrella, which led to large-scale inspections and repairs for Airbus A320neo aircraft—creating significant litigation risk and goodwill impairment for the company. Although defense orders are still growing, the struggles in the civilian aviation business have dragged down overall performance, so this stock still needs to be watched.

Northrop Grumman (NOC) is the world’s fourth-largest defense manufacturer and the largest radar maker. This company is very “pure” in the sense that almost all of its business is defense. It has leading technology, steady profitability, and has increased dividends for 18 consecutive years. Its current R&D direction is “strategic deterrence,” involving the space, missiles, and communications fields. These are all core areas for future U.S. military investment. So as long as the global situation remains unstable, countries will increase defense spending, and NOC, as a leader, can keep benefiting. In terms of a moat, this company has strong technological exclusivity. Globally, only U.S. companies can build stealth bombers. It’s worth investing in for the long term.

General Dynamics (GD) is also among the top five defense suppliers in the United States. What’s interesting is that this company not only has defense business, but also produces private jets. Its civilian segment serves high-end customers and is less affected by economic cycles. Because of this, the company’s revenue is very stable, with dividends growing for 32 consecutive years. In the U.S., only 30 companies can achieve this. Although its growth potential is limited, it has a deep moat, making it suitable for steady investors.

Boeing (BA) is well known as one of the two largest commercial aircraft manufacturers in the world. In terms of defense, it produces products such as B-52 bombers and Apache helicopters. But the company has really had some bad luck in recent years. A series of incidents involving the 737MAX led to a global grounding, and the pandemic also came along to add to the turmoil—leaving the civilian market in shambles. Even worse, Chinese commercial aircraft have started to rise, breaking Boeing’s long-standing monopoly. From an investment perspective, the defense segment may still grow steadily, but the outlook for the civilian business is hard to predict. That’s why Boeing is more suitable for buying at a discount rather than chasing after a rally.

There’s also Caterpillar (CAT). Although it is categorized as a defense stock, in reality its defense revenue is less than 30%; its business is mainly industrial equipment. The company has business across three major areas: construction, mining, and energy transportation. Growth in these areas mainly relies on global infrastructure investment. So Caterpillar is both a defense stock and not entirely a defense stock—its business development depends largely on global government infrastructure spending.

Now the question is: are defense stocks actually worth investing in? I think they are. From Buffett’s theory, good investing needs three conditions: a long runway, a deep moat, and a snowball effect. Defense stocks satisfy all of them. First, conflicts in human history have never stopped, and the demand for armies is endless—so the industry has a sufficiently long runway. Second, defense technology leads civilian technology. Because the most cutting-edge technology is in laboratories and in frontline units, civilian technology is released later. And since it involves defense and national security, the entry barriers are extremely high. Building trust takes time, which makes it very difficult for leading companies to be replaced—resulting in an extremely deep moat. Finally is growth. With the world trending toward regional politics and the probability of war increasing, countries are raising defense spending. This should become the norm for a long time to come.

However, there is one core point when investing in defense stocks: you must look at the share of a company’s defense revenue. If the proportion is too low, you won’t get much benefit from the defense “bonus,” and the stock may instead be dragged down by declines in the civilian segment. Take Raytheon and Boeing as examples: military demand increases, but problems in the civilian segment lead to a steep drop in the stock price, causing investors to suffer heavy losses. Therefore, before choosing targets, you should comprehensively consider the company’s financial condition, the defense proportion, changes in the civilian market, and global geopolitical conditions—in order to make an informed decision. Overall, defense stocks have a relatively deep moat because their main customers are governments, which means the risk of company failure is low. The close relationship between governments and enterprises makes them a good choice for long-term investment.