The defense stocks in my eyes: investment value under defense demand

Recently, global conflicts have been frequent, with the Russia-Ukraine war and the Israel-Palestine conflict continuing one after another. Unlike in the past, where human wave tactics were relied upon, modern warfare places greater emphasis on technological confrontation, including information warfare, public opinion warfare, and the use of high-tech weapons, such as advanced equipment like drones.

These changes have brought enormous business opportunities to military enterprises. Military spending by countries around the world is increasing year by year, and weapon systems that can reduce casualties are particularly sought after by various nations. I have a deep observation of the military industry, and today I would like to discuss the military stocks worth paying attention to and investment strategies.

What are military stocks?

In simple terms, military industrial stocks refer to companies that produce or develop products for the military, ranging from large weapon systems to small military supplies such as uniforms and canteens. Broadly speaking, any company that has business dealings with defense departments or includes defense-related organizations among its clients can be classified under the military industrial concept.

Since the Russia-Ukraine conflict, many countries have realized that the outcome of war depends not only on national strength but also on appropriate strategies and tactics, which can allow small countries to compete with large nations. Countries are increasing their investments in technological research and development, particularly in drones, precision missiles, and information warfare technologies, in pursuit of “minimal casualties and precise strikes.” In the era of declining birth rates, using money to exchange for battlefield effectiveness has become a common choice among nations, which has also led to substantial profits for military-industrial enterprises.

Considerations for Investing in Defense Stocks

Before investing in military industrial stocks, I believe it is essential to pay attention to the company's “military industrial ratio.” If the military business accounts for a low proportion and mainly consists of civilian products, the stock price and profits may not keep up with the benefits of the military industry.

Take Lockheed Martin and Raytheon, for example, over 80% of their revenue comes from the government, making them pure arms dealers. In contrast, companies like Boeing and General Dynamics are half military and half civilian enterprises. Even though they are all industry leaders, the proportion of military business determines how much of the military dividend a company can receive.

In addition, attention should be paid to whether enterprises meet the demands of future warfare. The size of future armies may not grow, but the importance of technology will increase. Currently, in regional conflicts, the importance of the air force and navy is greater than that of the army, and related orders will also be somewhat biased.

Leading U.S. Military Industrial Stocks Worth Watching

1. Lockheed Martin ( LMT )

As the world's largest arms dealer, Lockheed Martin primarily produces aircraft parts and missiles. The F35, F16, and Black Hawk helicopters are among its products. The performance of drones in the Russo-Ukrainian war has led to an increase in the company's orders and a rise in its stock price.

Lockheed Martin's stock price has steadily increased since its listing, with corrections primarily due to market adjustments. Its stable cash flow, high dividends, and leading position in the industry make it a suitable candidate for long-term holding.

2. Northrop Grumman(NOC)

Norg is the fourth largest defense contractor in the world and the largest radar manufacturer. As a pure defense stock, the company has stable profits, long-term rising share prices, and has increased its dividends for 18 consecutive years.

The monopolistic nature of NOC technology is strong, as stealth bombers can only be produced by American companies globally, and its business is closely tied to national security. If the competition between China and the U.S. and the stalemate in Ukraine continue, NOC will benefit directly. The Ukraine war has highlighted the importance of nuclear deterrence and long-range strikes, and NOC's leading position in these fields is solid.

3. General Power(GD)

General Dynamics is one of the top five arms suppliers in the United States, serving the Army, Navy, and Air Force, and also manufactures private jets for the wealthy elite.

Although it is not a pure military industry stock, its civilian portion's clients are not affected by economic conditions, making the overall revenue relatively stable. During the 2008 financial crisis and the 2020 pandemic, the company's profits showed no significant fluctuations. It has increased dividends for 32 consecutive years, making it one of only 30 companies in the United States to achieve this.

4. Boeing (BA)

Boeing is not only one of the two largest manufacturers of civil aircraft in the world but also one of the five largest arms suppliers in the United States. However, the company has faced a significant decline in performance in recent years due to the dual blows of the 737 MAX safety incidents and the pandemic.

Boeing's military revenue is likely to grow steadily in the future, but the outlook for the civilian sector is uncertain, especially with the rise of new competitors such as Comac in China. For investors, Boeing's stock is more suitable for buying at low points rather than chasing highs.

Investment Value of Military Stocks

Warren Buffett once said that accumulating wealth requires “enough wet snow, a long enough runway, and a deep enough moat.” I believe that military stocks precisely meet these three criteria:

1. Runway is long enough: Since recorded history, human conflicts have never ceased, and the demand for military forces is endless.

2. The moat is deep enough: Military technology often leads civilian technology, and the most advanced technologies exist in laboratories and military units. The uniqueness of national defense security creates a very high barrier to entry in the industry, and building trust takes a long time. Many patents are either shared or exclusive, making it difficult for leading companies to be replaced.

3. Snowball is wet enough: The global trend is towards regional politics, with increasing conflict risks and countries raising military spending. This trend may continue for a long time. The significant decline in military stocks is mainly due to “disarmament,” while the current possibility of that is very low.

However, I must emphasize that investors should pay attention to the proportion of military business in companies. Companies like Raytheon and Boeing, even with increasing military demand, may see their stock prices decline due to a downturn in civilian business or being involved in lawsuits, resulting in losses for investors.

The market demand for military-industrial stocks is steadily growing, but before investing, it is important to understand the proportion of military business within the enterprise, while also paying attention to changes in the market for civilian business. Compared to other industries, military-industrial stocks have a lower risk of bankruptcy because their main customers are the government, and the relationship between the two parties is close. Military-industrial stocks typically have a strong economic moat, making them worth considering for long-term investment.

When choosing to invest in defense stocks, I recommend taking into account the company's financial situation, industry trends, global geopolitical factors, and changes in the civilian market to make informed decisions.