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Top Defense Stocks: Tap into Booming Military Upgrades Now!
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Buongiorno, and welcome to another edition of Investing Intel from the team at ValueTheMarkets!
Across this newsletter you’ll find:
👉 Three stock insights
👉 A news roundup
👉 Investing signals
👉 Fear & Greed Index
👉 The finest content from ValueTheMarkets
👉 Key dates for your diary
👉 Some fun facts!
This week, we’re focusing on defense stocks and examining why now might be a great time to back the industry.
The world can be a dangerous place and Russia’s invasion of Ukraine, along with rising tensions between the West and China, have thrown fresh emphasis on the defense industry over the past year.
These stocks often provide reliable income and steady revenue growth, as its in the best interests of big spenders, such as the US government, to continually fund technological development to ensure the continued superiority of their military might.
So, which defense stocks do we like the look of?
The Big Guns - Raytheon Technologies (NYSE: RTX)
By market cap, Raytheon Technologies (NYSE: RTX) is the biggest defense contractor on the planet.
It’s not the industry the business started out in though. In fact, Raytheon began life in the 1920s as a refrigeration business under the name ‘American Appliance Company’.
The Second World War was what sent Raytheon down the defense route, with the company manufacturing radar systems during the conflict and soon graduating to missile guidance systems. This bizarre crossover meant the company briefly had one foot in the kitchen and the other on the battlefield.
Indeed, just three years before starting construction on guided missiles, a Raytheon employee invented the microwave. But that’s enough of the history lesson.
We like this stock for a wide variety of reasons. First off, it’s a favourite of Washington D.C. and it’s always handy to be popular with a government which spends as much as $800bn on its military each year, making it the biggest defense customer on the planet.
Then there’s the sheer diversification of Raytheon’s offerings. The company is no one-trick pony, with products in the aviation and cybersecurity sphere as well as defense. This all serves to insulate the business against industry-specific risks.
This diversification is a key reason why investors might want to choose Raytheon over fellow defense giant Lockheed Martin (NYSE: LMT).
This interest in aviation stands the business in good stead to benefit from increasing demand in the space, while technological expertise in fields such as radar and space exploration means the company is on the cutting edge of progress.
Raytheon’s financials are more than solid as well, with sales increasing by 4% to $67.1bn last year, while net income soared by more than a third to $5.2bn.
Investors enjoy the bonus of income too, with Raytheon having a healthy dividend yield of 2.26%.
In all, there’s a lot to like about Raytheon, which offers investors the chance to back a business with esteemed and high-spending customers, a diversified portfolio of talents and solid financial foundations.
The Seafarer - Huntington Ingalls Industries (NYSE: HII)
This young company is a spin-off of another, potentially more familiar, name in the defense game. Huntington Ingalls Industries (NYSE: HII) split from aircraft, munitions and space travel experts Northrop Grumman (NYSE: NOC) in 2011.
Today the company has more than 43,000 employees and a business backlog of $45bn, with its operations varying between shipbuilding and implementation of mission technologies like machine learning and automation.
Huntington Ingalls appeals firstly for its exploitation of a highly specialized niche. The company’s primary focus on naval shipbuilding and repair requires a high level of capital and significant expertise. In other words, there are high barriers to entry for new competitors looking to wade in on the company’s patch.
It’s an area enjoying significant demand too, with a major backlog of orders for new vessels and repairs from the US Navy, with this demand expected to be maintained over the coming years as the US seeks to modernize its fleet.
This could aid Huntington Ingalls in improving upon what are already very solid financials. Revenue increased by more than 12% across 2022, while net earnings rose by 6.4% to $579m. Further growth is expected in the ongoing year too, with the scheduled delivery of five new ships expected to help in pushing sales to the precipice of the $11bn mark.
Like Raytheon, investors can also expect some dividend income too. Huntington Ingalls’s current dividend yield is 2.26% and analysts appear to expect further dividend growth in the near future.
All told Huntington Ingalls looks like a smart purchase because of its defensible position of extreme innovation in the shipbuilding sector, its solid financials and the potential for dividend growth.
The Hidden Gem - Moog Inc (NYSE: MOG.B)
Last, we’re going to highlight Moog Inc (NYSE: MOG.B). You might not have heard about this business, as it’s not one of the biggest fixtures of the defense space. Indeed, this company might sound like the name of an eccentric character in your child’s favourite cartoon show, but we think it's actually one of the brightest lights in the defense space.
The business was founded, funnily enough, by the Moog brothers (Bill and Art) in 1950, along with friend Lou Geyer. Things started with a hydraulic servo valve which the trio patented in 1953 and the business has not looked back.
While its main applications are in the defense space, its technology has been used on everything from theme park rides at Universal Studios to the roof of Centre Court at Wimbledon.
Like Huntington Ingalls before it, one of the key reasons behind our recommendation of Moog is the company’s strong position to exploit modernization trends. The company has key technologies for the implementation of automation and robotics applications which can improve efficiency and reduce labor costs for customers.
Another factor which aligns the business with Huntington Ingalls is its successful identification of a niche. The business acts as a designer, manufacturer and systems integrator of precision motion and fluid controls and systems. This means its technology can be widely utilized in control systems and hydraulics in military and commercial flight, spaceflight, combat vehicles and missile technology.
With the company’s reputation for high quality, it looks to have secured this pocket of the defense sector for itself.
Indeed, revenues are steadily increasing for the business, while its backlog of business also appears to be consistently on the rise from its latest earnings updates. Moog says this is due to high demand from commercial aviation and defense components, as well as recovering demand in industrial automation and industrial components.
Industrial automation is the largest contributor to Moog’s industrial systems segment, again highlighting the strength of the company's position when it comes to benefiting from trends towards automation.
Finally, key valuation measures like price-to-sales ratio and price-to-book value appear to indicate that the stock is undervalued compared to contemporaries. This only further makes the case that Moog is something of a hidden gem.
News in Brief
Silicon Saved. First Citizens BancShares Inc (OTCMKTS: FIZN) has stepped in to purchase Silicon Valley Bank after the latter fell victim to the largest US banking collapse in 15 years. Though the collapse has still damaged sentiment, the move is seen as reassuring to the market.
On The Rebound. The news has contributed to First Republic Bank’s (NYSE: FRC) sizeable rebound after the opening bell on Monday. According to Bloomberg, US authorities are considering measures which would improve access to liquidity for First Republic and other struggling banks, another move which has pleased investors.
Tweet Trouble. A busy week for Twitter and Elon Musk has seen the South African billionaire allege that the social media giant is now worth less than $20bn, less than half the price he paid for it last year. The platform has also claimed that its source code has been leaked online, infringing copyright rules and leaving some aspects of its security vulnerable.
This week, our investing signals are going to further examine the theme of defense stocks.
Research from PwC has highlighted the fact that foreign arms sales notifications received by US defense contractors were triple their five-year average in the first quarter of 2022. As such, conditions for defense stocks look strong, with sales expected to jump over the next couple of years. With military spending also jumping by 8% in the US, things are looking rosy both at home and abroad.
Meanwhile, Deloitte’s 2023 outlook for the industry notes that the defense segment is expected to outperform commercial aerospace this year as the US and Europe have been galvanized into modernizing their armed forces by the Russian invasion of Ukraine. Future military technologies, which are those utilizing AI, IoT and robotics, have been earmarked as a major beneficiary of these increased budgets. As such, high-tech defense stocks appear to have major potential over the coming year. Indeed, 88% of senior executives surveyed said they perceived the general business outlook for the industry this year to be “somewhat to very positive”. However, risks remain. Supply chain issues and talent acquisition are highlighted by the report, while inflation is also a concern across the board.
While we are casting our intel net more generally now, it appears defense stocks were also at the top of those bought by Washington D.C. insiders last week, according to Quiver Quant:
Lockheed Martin (NYSE: LMT) - DC Insider Score 99
Raytheon Technologies (NYSE: RTX) - DC Insider Score 98
Pfizer (NYSE: PFE) - DC Insider Score 97
Microsoft (NASDAQ: MSFT) - DC Insider Score 97
AT&T (NYSE: T) - DC Insider Score 97
In particular, the inclusion of Microsoft is interesting as it comes amid reports that UK-based competition regulators are leaning towards allowing the software giant’s takeover of Activision Blizzard (NASDAQ: ATVI).
Then we come to the stocks which are generating the most chatter online. On Reddit, the most-mentioned stocks are:
First Republic Bank (NYSE: FRC) - 226 Mentions / 1,857 Upvotes
C3.ai (NYSE: AI) - 116 Mentions / 404 Upvotes
NVIDIA (NASDAQ: NVDA) - 114 Mentions / 565 Upvotes
Tesla (NASDAQ: TSLA) - 63 Mentions / 159 Upvotes
ChinData (NASDAQ: CD) - 57 Mentions / 195 Upvotes
While the other four are regular fixtures of the top spots, Asia-Pacific-focused data center solutions provider ChinData has elbowed its way onto the list after beating earnings expectations. There has also been speculation that the business could be subject to a takeover bid from the Chinese state-owned enterprise, China Merchants Group.
Meanwhile, if you’re looking for more insights on C3.ai, the second biggest stock on Reddit this week, stay tuned for our major breakdown of the company later this week…
Fear & Greed
The Fear and Greed Index is a measure of stock market sentiment calculated by CNN Business using seven measures including market momentum, market volatility, and safe haven demand. It’s meant to shed light on the emotions currently driving the market, giving you insight into how traders are making decisions. Remember, traders are humans, not robots.
This week, as you can see from the graphic below, we remain squarely in the realms of fear. However, investor sentiment appears to have steadied over the past week. A slight uptick could be expected as the ongoing banking crisis appears to have cooled slightly amid improvement from some European lenders and First Citizens Bancshares’s (OTCMKTS: FIZN) move to rescue SVB.
More Hot Content from ValueTheMarkets
This week's potential IPOs include a big chunk of tech in the form of Internet of Things specialist ARB IOT, EV batteries experts U Power and metaverse developers Global Mofy Metaverse.
This week’s company earnings preview includes Lululemon Athletica Inc (NASDAQ: LULU), Walgreens Boots Alliance Inc (NASDAQ: WBA), Constellation Software Inc. (TSX: CSU), K92 Mining Inc (TSE: KNT) (OTCQX: KNTNF), and Rumble Inc (NASDAQ: RUM).
Dates in the Diary
Tuesday 28th – US Consumer Confidence (Mar) / US FHFA Home Price Index (Jan)
Wednesday 29th – US Pending Home Sales Data (Feb) / ECB Non-Monetary Policy Meeting
Thursday 30th – US GDP Data (Q4) / US Personal Income Data (Feb) / US Personal Consumption Data (Feb) / EU Consumer Confidence (Mar) / EU Economic & Industrial Sentiment (Mar)
Friday 31st – Chicago PMI (Mar) / EU Flash Inflation (Mar)
Fun Fact – That’s the Tea
Have you ever jumped on board with a trend? Maybe you loved rocking JNCO jeans in the 90s or developed a Pokémon card addiction after watching the cartoon adventures of Ash, Pikachu, Misty and the gang.
Whatever pop culture phenomenon sucked you in, it’s unlikely that it made you money quite like it did in the case of this beverage experts.
Long Island Iced Tea Corp was a business that sold ready-made iced teas and lemonades. Makes perfect sense right?
However, a 2017 rebrand saw the business renamed as Long Blockchain Corp, in what might be one of business history’s most outlandish pivots. It seemed to have the desired effect, with the company’s share price rocketing by more than 300% as investors scrambled to get on board with a crypto trailblazer at the height of blockchain mania.
The problem was, Long Blockchain Corp didn’t really have anything to do with crypto.
Initially, the business said it was seeking to partner with or invest in blockchain businesses, but this thin premise was ripped apart by regulators. The company’s shares were booted off the NASDAQ index and the company found itself under investigation by both the SEC and FBI for securities fraud.
In the end, insider trading charges were levied on three individuals due to the name change, which effectively served as a pump-and-dump scheme.
Speaking at the time, SEC New York Office Director Richard Best, stated: “The SEC remains committed to preventing all types of fraudulent conduct in connection with purported ‘crypto’ companies, including profiting from trading on material non-public information.”
Of course, this must have been a major blow to the company’s owners.
Ah well, you know what they say. When life gives you lemons…
Until Next Time
Many thanks for taking the time to enjoy Investing Intel today, we hope you’ve enjoyed our insights and are looking forward to more in the week ahead.
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