Top Defense Stocks for Q2 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. Some estimates suggest European defense spending could increase by about two-thirds between 2021 and 2026, reaching €488 billion (about $531.4 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 3% over the last 12 months, while the Russell 1000 Index has shed almost a tenth of its value.

Here are the top three defense stocks with the best value, the fastest growth, and the most momentum. The benchmark figures above are as of April 5, and all data below are as of April 4.

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 provides defense products and technologies for the U.S. military. The company also offers a range of products and services related to advanced sensor technologies and integrated mission systems. In early April 2023, Leonardo announced it was awarded over $1 billion in contracts to provide integrated electric propulsion components for the U.S. Navy’s Columbia-class submarine.
• Triumph Group Inc.: Along with its subsidiaries, Triumph Group designs, manufactures, and repairs defense and aerospace component systems. Military spending accounted for about a third of Triumph's $329 million revenue in the last three months of 2022.
• 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. In late March, the company said its shipbuilding division was awarded a $1.3-billion addition to its preexisting contract with the U.S. Navy to provide detail design and construction of amphibious transport dock LPD 32. The contract now totals $1.54 billion.

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 1,000% were excluded as outliers.

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• CAE Inc.: CAE is a Canadian-based defense and security company focusing on simulation training in the aviation and healthcare sectors. In 2022 the company completed its acquisition of L3Harris's Military Training business as part of its expansion within the defense sector.
• Bombardier Inc.: Bombardier is a Canadian company that manufactures and services structural components for aircraft. Bombardier trades over-the-counter (OTC) in the U.S. under the ticker BDRBF.
• Hexcel Corp.: Hexcel manufactures composite materials and engineered and reinforcement products for use in defense, commercial aerospace, space, and general industrial applications. It sells its products globally.

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.: See company description above.
• Rolls-Royce Holdings PLC: Rolls-Royce is a British firm that builds aero, marine, and industrial gas turbines used in military and civilian aircraft. It also provides power generation, transmission, and other systems for the defense market. Revenue increased 14% in 2022, driven by a rebound in commercial travel demand.
• Aerojet Rocketdyne Holdings Inc.: Aerojet engages in the development and manufacturing of aerospace and defense products. In March, Aerojet stockholders voted to approve the company's acquisition by L3Harris Technologies (LHX), expected to close later in 2023.

The Impact of War on Defense Stocks

The 2022 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-$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 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 precludes investing in weapons manufacturers. ESG's popularity could pose a risk to defense stocks.