Top Defense Stocks

TDG, LMT, and NOC are top for value, growth, and momentum, respectively

Three fighter jets

Rob Shenk / Getty Images

Russia's invasion of Ukraine, which consulting firm Bain & Co. says may prompt NATO and European nations to boost defense budgets by as much as $75 billion, has been a boon for U.S. companies that make products including missiles, aircraft carriers, jet bombers, surveillance technology, and military satellites. While demand has eased more recently, the U.S. House of Representatives this week passed legislation that may lead to a record $858 billion defense budget in 2023.

Shares of some defense companies, including Lockheed Martin Corp., (LMT) Northrop Grumman Corp., (NOC), and Raytheon Technologies Corp. (RTX), are performing relatively well.

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 tracked the broader market with a total return of -9.7% over the last 12 months, in line with the benchmark Russell 1000 Index’s total return of -9.4%.

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 Dec. 1, 2022.

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.

Best Value Defense Stocks
  Price ($) Market Capitalization (Market Cap) ($B) 12-Month Trailing P/E Ratio
TransDigm Group Inc. (TDG) 634.64 34.5 9.4
Northrop Grumman (NOC) 530.30 81.6 15.1
Huntington Ingalls Industries Inc. (HII) 230.90 9.2 16.1

Source: YCharts

  • TransDigm Group Inc.: It produces and supplies engineered components for military and commercial aircraft. Net income increased by 27% on rising revenue for the fourth quarter.
  • Northrop Grumman: A global security company that provides services and security systems to clients in the aerospace, information systems, and electronics industries. On Nov. 16, Northrop Grumman announced a quarterly dividend of $1.73 per share that is payable Dec. 14 to shareholders of record on Nov. 28.
  • Huntington Ingalls Industries Inc.: This 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.

Fastest-Growing Defense Stocks
  Price ($) Market Cap ($B) EPS Growth (%) Revenue Growth (%)
Lockheed Martin (LMT) 483.69 126.8 203.6 3.5
Axon Enterprise Inc. (AXON) 185.55 13.2 -74.6 34.4
HEICO Corp. (HEI) 163.73 22.4 7.1 20.7

Source: YCharts

  • Lockheed Martin: An aerospace and defense company that designs and manufactures products for multiple segments, such as missile and fire control, space, and aeronautics. Lockheed Martin and Microsoft announced on Nov. 16 an agreement that will lead to Lockheed Martin fully operating within the Microsoft Azure Government Secret cloud.
  • Axon Enterprise Inc.: This company manufactures and sells conducted energy devices such as tasers. Another segment focuses on sensors and software used for law enforcement body-worn cameras.
  • HEICO Corp.: It designs, produces, and services products and components for a variety of industries, including aviation, defense, space, and telecommunications. On Aug. 29, Heico reported financial results for Q3 FY 2022 ended July 31. Net income attributable to the company climbed 7.3% year-on-year (YOY) on rising revenue.

Defense Stocks with the Most Momentum

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

Defense Stocks with the Most Momentum
  Price ($) Market Cap ($B) 12-Month Trailing Total Return (%)
Northrop Grumman (NOC) 530.30 81.6 55.5
Lockheed Martin (LMT) 483.69 126.8 51.1
Parsons Corp. (PSN) 49.23 5.1 49.9
Russell 1000 N/A N/A -9.4
Invesco Aerospace & Defense ETF (PPA) N/A N/A -9.7

Source: YCharts

  • Northrop Grumman: See company description above.
  • Lockheed Martin: See company description above.
  • Parsons Corp.: A national security and critical infrastructure company. In addition, it provides cybersecurity, missile defense, transportation, and environmental remediation services. On Nov. 2, Parsons reported Q3 earnings in which net income jumped 53.7%, in tandem with increased revenue.

The Impact of War on Defense Stocks

The Russian invasion of Ukraine and subsequent military activity has rapidly heightened demand for defense company products like 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.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.

Article Sources
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  1. Bain & Co. "War In Ukraine is Shifting Priorities in Aerospace and Defense."

  2. Reuters. "U.S. House Overwhelmingly Approves Bill Backing Record Military Spending."

  3. Yahoo Finance. "Raytheon Technologies."

  4. Yahoo Finance. "Northrop Grumman."

  5. Yahoo Finance. "Lockheed Martin."

  6. YCharts. “Financial Data.”

  7. Transdigm Group Inc. "TransDigm Group Inc. Reports Q3 Earnings Results."

  8. Northrop Grumman Corp. "Northrop Grumman Corp. Declares Quarter Dividend."

  9. Lockheed Martin Corp. "Lockheed Martin and Microsoft Reach Landmark Agreement."

  10. HEICO Corp. "HEICO Corp Q3 2022 Earning Results.

  11. Parsons Corp. "Parsons Corp. Reports Third Quarter Earnings."

  12. Gallup. "Defense Investing in the Context of U.S. Public Opinion."

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