Recently, I’ve been paying attention to a pretty interesting investment direction—what are some noteworthy targets in the defense industry stocks. Speaking of which, the global geopolitical situation has indeed been changing over the past few years, with the Ukraine-Russia conflict, Middle Eastern tensions, and the tense atmosphere around Taiwan Strait causing countries to reevaluate their national defense investments. I’ve noticed that defense budgets in China, the US, and Taiwan have all been increasing over the past two years, which actually reflects a deeper underlying trend.

In the past, wars relied on human wave tactics, but that’s no longer the case. Drones, precision missiles, information warfare, and various high-tech weapon systems are now the key to determining victory. Countries aiming for fewer casualties and higher efficiency need to invest heavily in technological R&D. That’s also why the defense industry has been so hot lately.

When it comes to defense stocks, the leading companies in the US are definitely worth watching. Lockheed Martin’s stock price has been steadily rising over the long term, although there have been corrections mostly due to broader market adjustments. Northrop Grumman, as the world’s largest radar manufacturer, has a particularly deep technological moat, and has seen 18 consecutive years of dividend growth—this kind of stability is among the best in defense stocks. General Dynamics is another interesting target; its civilian business provides stable revenue and strong resistance to volatility, with 32 consecutive years of dividend growth, a feat achieved by only about 30 companies in the US.

However, investing in defense stocks requires understanding some pitfalls. For example, Raytheon and Boeing have stable military orders, but their civilian divisions have issues that drag down their stock prices. Raytheon has quality problems with aircraft components, and Boeing still hasn’t shaken off the shadow of the 737 MAX, plus Chinese commercial aircraft are starting to compete in the market. These companies’ defense segments are not purely military, and their civilian business risks have become major variables.

Therefore, before investing, it’s crucial to check how much of their revenue comes from defense. Caterpillar, although classified as a defense stock, actually derives less than 30% of its revenue from military sales; most of it is from industrial equipment. For such companies, it’s more about the global infrastructure investment climate. Conversely, companies that are purely defense-focused have clients mainly in government defense departments. Their moats are especially deep because of high entry barriers, trust-building over time, and many proprietary technologies.

There are also many defense stocks with potential in the Taiwan stock market. Thunder Tiger Technology has shifted from a remote-controlled model aircraft manufacturer to a UAV defense enterprise, and its stock price surged significantly in 2022. With increasing military demand, there’s still room for growth. Hanxiang is involved in both national defense and civilian sectors; its civilian business includes maintenance, repairs, and parts sales. This diversification makes its performance more stable, unlike Boeing and Raytheon, which can be more easily affected by single issues.

From a market perspective, defense stocks indeed have potential. Human society has advanced to the point where many things have been eliminated, but conflicts never stop, so the demand for military forces is endless—this sector has a long runway. Defense technology often leads civilian tech by several years; the most cutting-edge R&D is usually in labs and military units, while civilian applications tend to use outdated technology. This creates a particularly deep moat for defense stocks. Plus, as the world increasingly leans toward regional politics, countries are ramping up military spending to hedge risks, and this trend probably won’t reverse in the short term.

However, when investing, it’s still necessary to consider comprehensively. While the demand for defense stocks is stable, it’s important to check the proportion of defense revenue, whether the civilian segment has issues, and if there are any litigation risks. The good news is that defense stocks generally don’t worry too much about company bankruptcy, since their main clients are governments. The close relationship between governments and defense companies creates a particularly strong moat. When selecting key defense stocks, the most important thing is to understand the true situation of the company, rather than just focusing on the defense segment alone.