Defense and Homeland Security Sector Ideas

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>>> 12 Best Defense Stocks To Buy Now


Insider Monkey

by Omer Farooq

March 22, 2023


https://finance.yahoo.com/news/12-best-defense-stocks-buy-121829919.html


In this article, we will discuss the 12 best defense stocks to buy now. If you want to explore similar stocks, you can also take a look at 5 Best Defense Stocks To Buy Now.

A Chinese spy balloon along with 3 other unidentified high-altitude objects have been shot down by the U.S. so far. On March 14, a U.S. drone was shot down by a Russian fighter jet over the black sea. The Russian Su-27 damaged the propellor of the American MQ-9 Reaper drone, after flying in close proximity over it, and forced it down. Meanwhile, the Ukraine war is still ongoing and there is still no end in sight, rather there is a risk of the war escalating.

Defense Analyst: "There's A Pretty Good Long-Term Setup"

On February 13 Cowen's defense and aerospace analyst, Roman Schweizer appeared in an interview on CNBC and to discuss the geopolitical situation and his view on the defense sector and defense stocks. "This is a very peculiar period in time", said Schweizer as he talked about the recent airborne objects shot down in North America. Schweizer thinks that unidentified objects flying at such high altitude can pose risk to commercial air travel. Here are some comments from Roman Schweizer about the U.S. defense budget, potential budget cuts, and defense stocks:

"I'd say that the group (defense stocks) has underperformed, since the GOP (Republicans) kinda came out with wanting those what would be potentially 10% spending cuts. Really, when you look at the backlog in spending, 2 years ago the budget was up 7%, last year up 10%. We estimate there's about $37 billion in funds for Ukraine that haven't been put on contract for some of the large defense primes. So the pump is primed and as soon as we get into some of the budgetary details, if any of that overhang lifts, it certainly is gonna bode well for the companies."

Roman Schweizer is positive on the defense sector and sees it driving outperformance. Schweizer thinks the consensus is that the Ukraine war is a "multi-year conflict" and defense spending is going up in not just the U.S., but also in Japan and Europe. Schweizer also noted that the supply-chain issues and labor shortages due to COVID-19 are also fading away and the defense sector is "starting to operate better". Finally, Roman Schweizer said that he thinks "there's a pretty good long-term setup" for defense stocks.

As the Ukraine war enters its second year, geopolitical risk is rising and defense spending is going up with it. On March 13, the U.S. Department of Defense released the proposed defense budget for fiscal 2024. The Biden-Harris Administration has submitted a request to Congress to increase the defense budget for fiscal 2024 to $842 billion, up $26 billion from fiscal 2023.

Amid rising geopolitical tensions, the outlook for the defense sector is starting to look attractive. As of March 21, the iShares U.S. Aerospace & Defense ETF (BATS:ITA) has gained 1.55% year to date, and has gone up by 16.65% over the past 6 months. Some of the best defense stocks to buy now according to analysts and hedge funds include Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT), and The Boeing Company (NYSE:BA).

Our Methodology

We screened for companies operating in the defense sector and picked the 30 largest companies operating in the space. We then sourced the hedge fund sentiment for these companies from Insider Monkey's proprietary database of over 900 elite money managers. We narrowed down our selection to stocks that were the most widely-held by hedge funds. We have ranked these stocks in ascending order of the number of hedge funds that have stakes in them.

12 Best Defense Stocks To Buy Now


12. Curtiss-Wright Corporation (NYSE:CW)

Number of Hedge Fund Holders: 22

On February 21, Curtiss-Wright Corporation (NYSE:CW) posted strong earnings for the fourth quarter of fiscal 2022. The company generated a revenue of $757.67 million, up 13.63% year over year and ahead of market estimates by $5.44 million. The company reported an EPS of $2.92 and outperformed EPS expectations by $0.01.

This February, Truist analyst Michael Ciarmoli raised his price target on Curtiss-Wright Corporation (NYSE:CW) to $190 from $183 and maintained a Buy rating on the shares.

Curtiss-Wright Corporation (NYSE:CW) was held by 22 hedge funds at the end of Q4 2022. These funds held positions worth $233.5 million in the company, up from $174.4 million in the previous quarter when 18 hedge funds held stakes in the company. The hedge fund sentiment for the stock is positive.

As of December 31, Select Equity Group is the top shareholder in Curtiss-Wright Corporation (NYSE:CW) and has disclosed a stake worth $99.2 million.

In addition to Curtiss-Wright Corporation (NYSE:CW), other top defense stocks that are popular among elite hedge funds include Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT), and The Boeing Company (NYSE:BA).


11. Spirit AeroSystems Holdings, Inc. (NYSE:SPR)

Number of Hedge Fund Holders: 34

Spirit AeroSystems Holdings, Inc. (NYSE:SPR) is a leading global manufacturer of commercial aerostructures. The company operates through three divisions: Commercial, Defense & Space, and Aftermarket. As of March 21, the stock has gained 27.91% over the past 6 months.

On February 13, Barclays analyst Davis Strauss raised his price target on Spirit AeroSystems Holdings, Inc. (NYSE:SPR) to $50 from $42 and maintained an Overweight rating on the shares. The stock is one of the best defense stocks to buy now according to hedge funds and analysts.

At the end of Q4 2022, 34 hedge funds were long Spirit AeroSystems Holdings, Inc. (NYSE:SPR) and disclosed stakes worth $280.5 million in the company. Of those, Marshall Wace LLP was the leading investor in the company and disclosed a position worth $67 million.


10. Howmet Aerospace Inc. (NYSE:HWM)

Number of Hedge Fund Holders: 35

Howmet Aerospace Inc. (NYSE:HWM) is an American manufacturer of jet engine components, fasteners and titanium structures for aerospace applications. The stock is placed tenth among the best defense stocks to buy now. On February 14, the company released earnings for the fourth quarter of fiscal 2022. Howmet Aerospace Inc. (NYSE:HWM) reported an EPS of $0.38 and generated a revenue of $1.51 billion, up 17.74% year over year and ahead of Wall Street consensus by $44.12 million.

This February, Argus raised its price target on Howmet Aerospace Inc. (NYSE:HWM) to $49 from $43 and reiterated a Buy rating on the shares.

Howmet Aerospace Inc. (NYSE:HWM) was spotted on 35 investors' portfolios at the end of Q4 2022. These funds disclosed collective stakes worth $2.94 billion in the company, up from $2.67 billion in the preceding quarter with 46 positions. As of December 31, Elliott Management is the most prominent shareholder in Howmet Aerospace Inc. (NYSE:HWM) and has disclosed a position worth $1.36 billion.


9. Textron Inc. (NYSE:TXT)

Number of Hedge Fund Holders: 36

On February 2, Textron Inc. (NYSE:TXT) declared a quarterly cash dividend of $0.02 per share. The dividend is payable on April 1 to stockholders of record on March 10. As of March 21, the stock is offering a forward dividend yield of 0.12%.

As of December 6, Morgan Stanley analyst Kristine Liwag has an Overweight rating and a $84 price target on Textron Inc. (NYSE:TXT). The stock has gained 12.49% over the past 6 months, as of March 21, and is trading at a PE multiple of 17x.

At the close of the fourth quarter of 2022, 36 hedge funds were eager on Textron Inc. (NYSE:TXT) and held collective positions worth $819.5 million in the company. This is compared to 28 hedge funds in the previous quarter with stakes worth $626.8 million. The hedge fund sentiment for the stock is positive.

As of December 31, AQR Capital Management is the largest stockholder in Textron Inc. (NYSE:TXT) and has a stake worth $133 million.


8. L3Harris Technologies, Inc. (NASDAQ:LHX)

Number of Hedge Fund Holders: 45

At the end of the fourth quarter of 2022, 45 hedge funds were bullish on L3Harris Technologies, Inc. (NASDAQ:LHX) and disclosed stakes worth $1.28 billion in the company. This is compared to 39 positions in the preceding quarter with stakes worth $680.2 million. The hedge fund sentiment for the stock is positive.

On January 30, Morgan Stanley analyst Kristine Liwag updated her price target on L3Harris Technologies, Inc. (NASDAQ:LHX) to $264 from $278 and maintained an Overweight rating on the shares. The stock is placed eighth on our list of the best defense stocks to buy now according to analysts and hedge funds.

On February 24, L3Harris Technologies, Inc. (NYSE:LHX) raised its quarterly dividend to $1.14 per share, up 1.8% from its prior dividend of $1.12. The dividend is payable on March 24 to investors or record on March 10. As of March 21, the stock is offering a forward dividend yield of 2.31%

As of December 31, Diamond Hill Capital is the leading shareholder in L3Harris Technologies, Inc. (NASDAQ:LHX) and has a position worth $233.8 million.


7. General Dynamics Corporation (NYSE:GD)

Number of Hedge Fund Holders: 46

General Dynamics Corporation (NYSE:GD) is one of the best defense stocks to buy now. On March 9, the company declared a quarterly cash dividend of $1.32 per common share, up 4.8% from its prior dividend of $1.26. The divided is payable on May 12 to stockholders of record on April 13. As of March 21, General Dynamics Corporation (NYSE:GD) is offering a forward dividend yield of 2.42% and is trading at a PE multiple of 18x.

This January, Morgan Stanley analyst Kristine Liwag raised her price target on General Dynamics Corporation (NYSE:GD) to $248 from $243 and maintained an Equal Weight rating on the shares.

General Dynamics Corporation (NYSE:GD) was a part of 46 investors' portfolios at the end of Q4 2022. These funds held collective positions worth $8.22 billion in the company, up from $7.10 billion in the preceding quarter with 35 positions. The hedge fund sentiment for the stock is positive.

As of December 31, Longview Asset Management is the top investor in General Dynamics Corporation (NYSE:GD) and has a stake worth $7 billion.


6. HEICO Corporation (NYSE:HEI)

Number of Hedge Fund Holders: 48

Wall Street is bullish on HEICO Corporation (NYSE:HEI). This March, Truist analyst Michael Ciarmoli raised his price target on HEICO Corporation (NYSE:HEI) to $190 from $169 and maintained a Buy rating on the shares. As of March 21, the stock has returned 12.78% to investors over the past 6 months.

At the end of Q4 2022, HEICO Corporation (NYSE:HEI) was held by 48 hedge funds. These funds disclosed positions worth $975.7 million in the company, up from $714.6 million in the previous quarter when 42 hedge funds held stakes in the company. The hedge fund sentiment for the stock is positive.

As of December 31, Citadel Investment Group is the largest investor in HEICO Corporation (NYSE:HEI) and holds a stake worth $128.5 million.

Other defense stocks that Wall Street analysts are positive on include Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT), and The Boeing Company (NYSE:BA).


5. Northrop Grumman Corporation (NYSE:NOC)

Number of Hedge Fund Holders: 49

At the end of the fourth quarter of 2022, 49 hedge funds were long Northrop Grumman Corporation (NYSE:NOC) and held stakes worth $1.53 billion in the company. This is compared to 46 positions in the preceding quarter with stakes worth $1.05 billion. As of December 31, GQG Partners is the leading shareholder in the company and has a stake worth $428 million.

On January 31, Wells Fargo analyst Matthew Akers raised his price target on Northrop Grumman Corporation (NYSE:NOC) to $470 from $460 and maintained an Equal Weight rating on the shares. As of March 21, the stock is trading at a PE multiple of 14x and is offering a forward dividend yield of 1.54%. Northrop Grumman Corporation (NYSE:NOC) is placed fifth among the best defense stocks to buy now.

Here is what LRT Capital had to say about Northrop Grumman Corporation (NYSE:NOC) in its October 2022 investor letter:

“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation the US defense market is now controlled by five large companies: The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).

Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This industry structure has allowed Northrop to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximate 15x, next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ division submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-35 and F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; and so on…”


4. Raytheon Technologies Corporation (NYSE:RTX)

Number of Hedge Fund Holders: 51

Raytheon Technologies Corporation (NYSE:RTX) has gained 17.45% over the past 6 months, as of March 21, and is offering a forward dividend yield of 2.26%. The stock is one of the best defense stocks to buy now according to analysts and hedge funds. This January, Citi analyst Jason Gursky raised his price target on Raytheon Technologies Corporation (NYSE:RTX) to $106 from $104 and maintained a Neutral rating on the shares.

At the close of Q4 2022, Raytheon Technologies Corporation (NYSE:RTX) was spotted on 51 hedge funds’ portfolios. These funds held positions worth $1.81 billion in the company, up from $1.61 million in the preceding quarter when 55 hedge funds held stakes in the company.

As of December 31, Balyasny Asset Management is the leading shareholder in Raytheon Technologies Corporation (NYSE:RTX) and has a stake worth $229.9 million.

Here is what Carillon Tower had to say about Raytheon Technologies Corporation (NYSE:RTX) in its Q3 2022 investor letter:

“Raytheon Technologies Corporation (NYSE:RTX) announced strong results led by strength in its commercial segment, but weakness in its defense business led to investor consternation. Management guided to a recovery in this segment, citing both transitory supply chain issues and continued strong demand.”


3. Lockheed Martin Corporation (NYSE:LMT)

Number of Hedge Fund Holders: 53

Analysts see promising upside to Lockheed Martin Corporation (NYSE:LMT). This January, DZ Bank analyst Robert Czerwensky upgraded Lockheed Martin Corporation (NYSE:LMT) to Buy from Hold and reiterated his price target of $523 on the stock.

Over the past 6 months Lockheed Martin Corporation (NYSE:LMT) has returned 12.48% to investors, as of March 21, and the stock is offering a forward dividend yield of 2.52%. Lockheed Martin Corporation (NYSE:LMT) is placed third on our list of the best defense stocks to buy now.

Lockheed Martin Corporation (NYSE:LMT) was spotted on 53 hedge funds’ portfolios at the close of Q4 2022. These funds held collective positions worth $2.13 billion in the company, up from $1.69 billion in the preceding quarter with 53 positions. As of December 31, GQG Partners is the most prominent stockholder in Lockheed Martin Corporation (NYSE:LMT) and holds a stake worth $559.9 million.

Here is what Vltava Fund had to say about Lockheed Martin Corporation (NYSE:LMT) in its Q3 2022 investor letter:

“LMT is one of the world’s largest aerospace and defence companies. The war in Ukraine has reminded investors and the wider public just how important these companies are. The aerospace and defence industry in the USA is an established oligopoly. This means that a few large firms play a dominant role. While collectively they comprise an oligopoly, individually they often have monopoly positions in particular narrower segments. Their main counterparty is the US government, a key customer in what is known as a monopsonist position. This is a rather unusual situation, but one that is very advantageous for companies such as LMT.

LMT has a strong and long-term sustainable competitive advantage ensuing from the fact that its products are developed and manufactured at an extremely high level of technology and complexity, its development and contract cycles are measured in decades, and the costs for the government to switch to alternative suppliers are high. Moreover, part of the production is classified as secret, which further takes the wind out of the sails of potential competitors. This results in a very high return on capital and admittedly a slowly but steadily growing business.

In most NATO countries, which are LMT’s customers, defence outlays are based upon the size of GDP. This is currently growing very fast in nominal terms due to inflation in most countries. A number of countries have also announced significant increases in defence budgets, whether it be Germany, which aims to get to the NATO-agreed 2% of GDP, or Poland, which wants to spend more than twice as much on defence…”


2. The Boeing Company (NYSE:BA)

Number of Hedge Fund Holders: 53

53 hedge funds disclosed having stakes in The Boeing Company (NYSE:BA) at the end of Q4 2022. The total value of these stakes amounted to $1.66 billion, up from $691.7 million in the previous quarter with 42 positions. The hedge fund sentiment for The Boeing Company (NYSE:BA) is positive and the stock is one of the best defense stocks to buy now.

As of March 21, shares of The Boeing Company (NYSE:BA) have soared 47.57% over the past 6 months. Wall Street likes the stock. This March, Susquehanna analyst Charles Minervino reiterated a Positive rating and his $245 price target on The Boeing Company (NYSE:BA).

As of December 31, Adage Capital Management is the largest shareholder in The Boeing Company (NYSE:BA) and has a stake worth $250 million.

Here is what Jackson Square Partners had to say about The Boeing Company (NYSE:BA) in its Q3 2022 investor letter:

“For The Boeing Company (NYSE:BA)–in short, we believe the worst of Boeing’s idiosyncratic issues are behind it, the airframe duopoly remains as protected as ever, and at current prices (where we’ve been adding), the stock is trading around ~6x FCF on 2025E. Current airframe production is running materially below expected travel demand over the next 5-10 years, creating a structural supply/demand imbalance that we believe will drive a decade of strong growth in civil aerospace from here. In our 2Q’22 correspondence, we described the attributes of our ideal growth ballast and said we hoped to convert another in the coming months – we believe Boeing checks all those boxes.”


1. TransDigm Group Incorporated (NYSE:TDG)

Number of Hedge Fund Holders: 71

On February 7, TransDigm Group Incorporated (NYSE:TDG) announced strong earnings for the first quarter of fiscal 2023. The company reported an EPS of $4.58 and outperformed EPS estimates by $0.28. The company generated a revenue of $1.40 billion, up 17% year over year and ahead of Wall Street consensus by $19.04 million. As of March 21, TransDigm Group Incorporated (NYSE:TDG) has returned 29.16% to investors over the past 6 months.

On February 28, BofA analyst Ronald Epstein raised his price target on TransDigm Group Incorporated (NYSE:TDG) to $890 from $770 and maintained a Buy rating on the shares. TransDigm Group Incorporated (NYSE:TDG) tops our list of the best defense stocks to buy now according to analysts and hedge funds.

At the close of the fourth quarter of 2022, 71 hedge funds were bullish on TransDigm Group Incorporated (NYSE:TDG) and disclosed stakes worth $5.93 billion in the company. This is compared to 63 hedge funds in the previous quarter with stakes worth $4.95 billion. The hedge fund sentiment for the stock is positive.

As of December 31, Stockbridge Partners is the top stockholder in TransDigm Group Incorporated (NYSE:TDG) and has disclosed a position worth $1 billion.

Here is what Vulcan Value Partners had to say about TransDigm Group Incorporated (NYSE:TDG) in its Q4 2022 investor letter:

“TransDigm Group Incorporated (NYSE:TDG) is an aerospace company making original equipment manufacturer and aftermarket parts for commercial and military aircraft. Approximately 90% of its net sales are from proprietary parts. TransDigm is the sole source provider for parts representing approximately 80% of its revenues. The company grew its EBITDA just over 20% in fiscal 2022 as air travel recovered from the COVID-19 downturn. We believe that the company will have another strong year in fiscal 2023.”

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