I’ve been keeping a close watch on the defense sector lately, and I found a few things worth discussing.

As you can see, the global situation has been changing quite quickly in recent years. Conflicts in Ukraine and the Middle East have been following one after another. Countries have started to realize a key issue: the era when modern warfare relied on brute-force “human wave” tactics is over. High-tech weapons such as drones, precision missiles, and information warfare have become the stars of the show. This, in turn, has led to defense spending increasing year after year—especially in countries seeking to reduce casualties through technological means.

That’s why defense stocks have drawn a lot of investor attention over the past couple of years. But there’s a pitfall to avoid here—not all companies labeled “defense” are worth investing in. The key is how high a company’s share of defense-related business is. For example, Lockheed Martin and Raytheon are purely arms manufacturers, with more than 80% of revenue coming from the U.S. Department of Defense. But Boeing and General Dynamics are different: they are partly military and partly civilian, with a large portion coming from civilian business.

Let me briefly organize several key targets. Lockheed Martin (LMT) is the world’s largest arms manufacturer, and aircraft such as the F35 and F16 are among its products. Since the war in Ukraine began, drone demand has surged, company orders have increased, and the stock price has risen along with it. Over the long term, the company has stable cash flow and decent dividends—making it indeed a leader in the defense sector.

Raytheon (RTX) is the second-largest weapons supplier for the U.S. Department of Defense. It mainly makes various missiles and defense systems. However, the company’s stock performance in 2023 was weak, mainly because quality issues arose in its Pratt & Whitney aircraft engines, which led to large-scale inspections and overhauls for Airbus A320neo aircraft. This problem affected not only civil aviation but also involved lawsuits and customer losses. So even if defense orders continue to grow steadily, weakness in the civil business can still cause the stock price to plummet. This one requires continued observation.

Northrop Grumman (NOC) is the world’s fourth-largest defense manufacturer and the largest radar manufacturer. The company is very “pure”—it mainly makes products related to strategic deterrence, involving space, missiles, and communications technology. Its technological monopoly is strong, and its moat is deep. As long as global tensions remain at this level, defense spending won’t decrease. The company’s stability is also evident from the fact that its dividend growth has continued for 18 consecutive years.

General Dynamics (GD) is among the top five U.S. arms suppliers, serving the Army, Navy, and Air Force. Interestingly, although its defense share isn’t the highest, its civilian segment—mainly Gulfstream jets—is not affected by the business cycle, so overall revenue remains quite stable. Even during the 2008 financial crisis and the 2020 pandemic, the company’s profits did not show any obvious fluctuations. Dividends have grown for 32 consecutive years, which only 30 companies in the United States have achieved.

Boeing (BA) is widely known as one of the only two major commercial aircraft manufacturers in the world. But the company’s problem is that its commercial business carries too much risk. Factors such as the 737 MAX accidents, the impact of the pandemic, and competitive threats from Chinese commercial aircraft have been weighing on the stock price. Even though demand for its military business (such as the B52 bombers and Apache helicopters) is stable, a downturn in the civilian segment is enough to offset that revenue. From an investing perspective, Boeing is more suitable for buying on dips rather than chasing rallies.

Caterpillar (CAT) is a heavy industrial equipment manufacturer that doesn’t seem closely related to defense at first glance, but in reality, its defense business accounts for less than 30%. The company mainly makes money from engineering machinery and mining equipment. Recently, as China’s infrastructure investment has increased, the company’s revenue has grown accordingly as well. This company is both—part defense stock, part not fully a defense stock. Its performance mainly depends on global infrastructure investment and demand for raw materials.

In the final analysis, why are defense stocks worth paying attention to? I think there are three core reasons. First, this industry has a long runway. As human civilization has developed to where it is now, conflicts have never stopped, and the demand for armies is endless. Second, the moat is deep. Defense technology leads civilian technology, and the entry barriers are extremely high. Building trust takes a long time, so leading companies are hard to replace. Finally, growth is supported. As the world enters an era of regional politics, countries are increasing military spending, and large-scale demobilization in the short term is unlikely.

But there’s an important reminder here: the risks of investing in defense stocks mainly come from the civilian business. Just look at Raytheon and Boeing. Even if defense orders remain stable, if the civilian market weakens or lawsuits arise, the stock price can still crash. Therefore, before choosing a target, you must clearly understand the company’s business composition—you can’t focus only on the defense segment.

Overall, pure-play defense companies do have fairly deep moats and are worth long-term attention. But before investing, you should take a comprehensive view of the company’s financial condition, industry trends, changes in geopolitics, and risks in the civilian market—so that you can make a wise decision.