Defense stocks have seen a lift over the past few weeks as tension between the U.S. and Iran caused a rush into the sector. And this stampede has caused many to question whether it’s a rally worth chasing.
History tells us that defense stocks typically beat the market for about six months after a conflict begins. But, some say that historical analysis isn’t entirely accurate. After all, it’s based on just four previous major conflicts. Plus, we’re still unsure as to whether or not the tension with Iran will grow into something more serious over the next few months.
However, the growing unrest in the Middle East isn’t the only reason to buy defense stocks. The 2020 election provides another catalyst for defense stocks. According to Myles Walton of UBS, defense stocks have outperformed the broader market nine of the last 10 election cycles. The average outperformance was roughly 16%.
That suggests that even if things don’t escalate in Iran, the defense sector has a good chance of marching higher in the months ahead of the 2020 election.
With that in mind, here’s a look at three defense stocks worth considering for your portfolio.
Defense Stocks to Buy: Lockheed Martin (LMT)
For long-term investors, Lockheed Martin (NYSE:LMT) is one of the best bets in the defense space. That’s because the firm has been a consistent performer that’s likely to deliver long beyond just the 2020 elections or conflict in Iran.
LMT’s earnings per share (EPS) has grown by 21% per year over the past three years. If the company can keep up that kind of growth, its share price is certainly worth its 19.7 price-earnings (P/E) ratio.
Furthermore, LMT stock appears to have plenty of growth catalysts on the horizon, as well. The firm recently won a $1.93 billion contract for F-35 Lightning II Joint Strike Fighter Air Systems. The F-35 is seen as a big moneymaker for LMT moving forward as the U.S. pursues a more integrated approach to military strategy. Its aeronautics arm also closed on a $172 million contract with the U.S. Navy and Marine Corps.
Plus, LMT offers a respectable 2.3% dividend yield, which should help ease the pain of any turbulence moving forward.
General Dynamics (GD)
General Dynamics (NYSE:GD) stock makes for another good long-term play because of the firm’s diversified business and 2.3% dividend yield. GD’s expansive portfolio includes jets, land vehicles, submarines and information technology services. Its submarine business is especially important to the firm’s value proposition, as General Dynamics is just one of two companies that produces submarines.
Also, GD has a business jet arm that offers some security if defense spending loses momentum. General Dynamics’ Gulfstream jets are seen as a growth catalyst in the year ahead. The firm delivered its first G600 Gulfstream jets delivery in the third quarter, and the firm’s G700 jets are due to start delivery in 2022. The Gulfstream jets have been underperforming in recent quarters, but that’s expected to turn around in the quarters to come.
Overall, GD stock is an extremely well-rounded pick that looks poised to deliver not only this year as the sector sees a lift, but in the years to come.
L3Harris Technologies (LHX)
L3Harris Technologies (NYSE:LHX) stock is the most expensive on this list with a P/E ratio of 26.6. However, the firm looks deserving of its higher price tag due to it’s future growth opportunities.
Last year, Harris Corp acquired L3 Technologies to create L3Harris. The new firm is expected to enjoy synergies from the two companies’ parallel businesses. The acquisition also made LHX more competitive against some of the defense space’s larger players.
2019 was a great year for LHX, but that doesn’t mean the ride is over. LHX is likely to see margins rise considerably in the year ahead as management continues to integrate the businesses. LHX stock should see an influx of cash this year as management sells off non-core assets, and finds ways to combine business processes.
Moving forward, the new, more powerful business should be able to win more government contracts — and continue delivering to investors in the years ahead.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.