Top Defense Stocks for March 2023

Russia's invasion of Ukraine has been a boon for U.S. defense companies that produce missiles, aircraft carriers, bomber jets, surveillance technology, and military satellites. By some estimates, the war could prompt European defense spending to increase as much as 65% between 2021 and 2026 to €488 billion a year ($519.7 billion). International arms sales by U.S. companies jumped almost 50% last year to over $153 billion.

Shares of some U.S. defense companies, including Lockheed Martin Corp., (LMT) Northrop Grumman Corp., (NOC), and Raytheon Technologies Corp. (RTX), have benefited from increased spending, outperforming the broader market over the past year.

The Invesco Aerospace & Defense ETF (PPA) holds a broad range of stocks, including some from companies that are not pure-play defense companies, such as those involved in civilian aerospace manufacturing. However, it is the closest proxy available for the broader defense industry. PPA has risen about 5% over the last 12 months, compared with an 8.2% drop for the benchmark Russell 1000 Index.

Here are the top three defense stocks in each category with the best value, the fastest growth, and the most momentum. The performance figures above and all statistics in the tables below are as of Feb. 23, 2023.

Best Value Defense Stocks

These are the defense stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profits can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you’re paying less for each dollar of profit generated.

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• Leonardo DRS Inc.: Leonardo DRS provides defense products and technologies for the U.S. military. In addition, the company offers a range of products and services dealing with advanced sensor technologies and integrated mission systems.
• Triumph Group Inc.: Along with its subsidiaries, Triumph Group designs, manufactures, and repairs defense and aerospace component systems. The company's net income grew 51.3% in the third quarter of its 2023 fiscal year.
• Huntington Ingalls Industries Inc.: Huntington Ingalls is a shipbuilding company that designs, builds, and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard. It also provides ship repair and maintenance services.

Fastest-Growing Defense Stocks

These are the top defense stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and most recent quarterly YOY earnings-per-share (EPS) growth. Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax law or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 2,500% were excluded as outliers.

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• Leonardo DRS Inc.: See company description above.
• CAE Inc.: CAE is a Canadian-based defense and security company focusing on simulation training in the aviation and healthcare sectors.
• Raytheon Technologies Corp.: Raytheon is a defense and aerospace company that provides various products and aftermarket services for commercial and military customers. The company plans to reorganize in the second half of 2023 to focus on three distinct business units: Collins Aerospace, Pratt & Whitney, and Raytheon.

Defense Stocks with the Most Momentum

These are the defense stocks that had the highest total return over the last 12 months.

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• Bombardier Inc.: Montréal-based Bombardier manufactures structural components for aircraft as well as offering aftermarket maintenance. Bombardier Inc. trades over-the-counter (OTC) in the U.S. under the ticker BDRBF. The company's revenue grew 14% year-over-year to $6.9 billion in 2022, and its order backlog grew over 20% to almost $15 billion.
• Axon Enterprises Inc.: Axon manufactures and sells conducted energy devices such as tasers, as well as sensors and software used for law enforcement body-worn cameras. Axon's revenue in the fourth quarter of 2022 jumped 55% from the year before. Net income rose to $29 million from -$14 million the prior year.
• Aerojet Rocketdyne Holdings Inc.: Aerojet Rocketdyne engages in the development and manufacturing of aerospace and defense products. The company's revenue grew 10% year-over-year in the fourth quarter of 2022. Though net income fell 60% on rising costs from supply chain disruptions and litigation of its abandoned Lockheed Martin merger and an internal proxy contest between its CEO and executive chairman.

The Impact of War on Defense Stocks

The Russian invasion of Ukraine and subsequent military activity has rapidly heightened demand for defense company products such as missiles, aircraft carriers, jet bombers, surveillance technology, and military satellites. A report by consulting firm Bain & Co. said that NATO and European countries could boost their total defense budgets by $50 billion to $75 billion as a result of the war.

While massive spending on defense products is a boon to defense companies, it also poses challenges. Defense companies must speed up production and innovate more quickly during times of war. The Bain report said that defense companies may be left scrambling to meet demand, particularly given supply chain issues hampering weapons production.

Risks of Defense Stocks

Consumer sentiment often affects the performance of a company, regardless of its sector. In the case of defense companies, which often largely do business with governments, consumer sentiment is a less important influence. However, consumer opinions can drive government policy, which may more directly impact a defense company's performance.

A February 2022 poll by Gallup found that Americans had divided opinions as to whether the U.S. spent too much, not enough, or the right amount on defense. Socially responsible investing following principles of environmental, social, and governance (ESG) factors typically holds that the manufacturing of military weapons is a negative. If public opinion changes and moves in that direction, defense stocks may become a risky investment.

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