Are these the best defence stocks to watch?
When international tensions intensify, the impact of the conflict is felt by the defence industry around the world. Learn how to trade or invest in the best defence stocks with us.
Defence stocks: what you need to know about the industry
The best way to look at the defence industry is to recognise that it’s always going to exist. This doesn’t mean that there’s always going to be a war looming, but the development of nuclear weapons and modern artillery serve as a huge deterrent for countries to resolve conflict on the battlefield.
Every government around the world has the responsibility to safeguard and defend its sovereignty. This means guarding against domestic and foreign threats, cyberterrorism, and so many other attacks, with military might. As a result, the defence industry manufactures new artillery that’ll defend against airborne, land and aquatic threats.
More defence stocks are becoming eco-conscious, developing processes that are less reliant on steel and opting for advanced, nuclear technology. This presents an opportunity to trade or invest in defence stocks that are environmentally friendly.
It’s important to note that since defence stocks are cyclical stocks. They’re often far more volatile than non-cyclical stocks, because they see significant growth during periods of economic uncertainty and rapid declines during peaceful periods.
The Russian invasion of Ukraine is the most recent example of international conflict that has had a direct impact on global defence stocks. Across the Atlantic, US president Joe Biden has petitioned Congress to authorise $33 billion in military aid to Ukraine.1
This comes after 3000 US troops were sent into Poland and Romania in early February 2022, which are both North Atlantic Treaty Organization (NATO) allies that border Ukraine. This scenario shows how defence stocks can instantly be affected.
How to trade or invest in defence shares
- Decide whether you want to trade or invest
- Choose your preferred market
- Create an account or practise on a demo
- Set your trade size and manage your risk
- Open your position and monitor your trade
Note that you can trade in the defence industry through exchange traded funds (ETFs) such as iShares Aerospace & Defense ETF. The table below shows the differences of owning a trading or investment account with us:
| Trading defence stocks | Investing in defence stocks |
|---|---|
| Take a position using a spread betting and CFD trading account | Invest using our share dealing account |
| Leverage your exposure – you’ll only pay a deposit to get exposure to the full position size | Pay the full value of the shares you buy upfront |
| Leverage means both profit and loss will be magnified to value of the full trade – so you could gain or lose more money than you’d expect1 | You may get back less than what you put in because as much as the value of shares can rise, it can also fall as well |
| Trade tax free with spread bets and offset losses with CFDs2 | Invest tax free with a stocks and shares ISA3 |
| Take shorter-term positions | Focus on longer-term growth |
5 best defence shares to watch
Note that these companies have not been chosen as the best defence stocks alone, but rather based on various factors including market cap, future growth prospects and latest results.
Lockheed Martin
Lockheed Martin is one of the leading defence companies in the world. It manufactures fighter jets and high-tech missiles among other ventures in its portfolio.
Along with its forays into aviation, Lockheed Martin is also involved in space exploration. It recently teamed up with General Motors to design the next generation of lunar rovers to navigate the moon’s surface.2
In March 2022, Lockheed Martin’s share price saw a jump as investor pushed for buybacks and in expectation of a protracted war, believed there’ll be eventual windfall in the process. The stock price has been on the upward trend since.
In the first quarter (Q1) 2022, Lockheed Martin reported net sales of $15 billion, a drop compared to $16.3 billion in the Q1 of 2021. The net earnings also fell short of the previous year’s heights, posting $1.7 billion in comparison to the $1.8 billion in Q1 2021.4
Boeing
While Boeing is the undisputed giant of commercial aeroplanes, it was able to leverage its resources to extend towards creating military aircrafts and helicopters.
As the go-to aircraft manufacturer for the Pentagon, Boeing is responsible for the VC-25B Air Force One presidential airplane, which required a replacement programme in 2022 that cost $660 million.5
Boeing has been hit by production issues of late, with several delays causing investor to rid themselves of the stock leading to the share price plummeting.6 In Q1 of 2022, generated a $929 million loss from operations including $1.3 billion in earnings charges on four military aviation development programmes.5
Despite the high cost, Boeing posted revenue of $14 billion driven by lower defence volume and charges on fixed-price defence development programmes, partially offset by commercial services volume.7
Northrop Grumman
Northrop Grumman is renowned for making highly specialised stealth bombers for manned and unmanned occupancy. The defence company also creates nuclear missiles, drones, and submarines as part of its comprehensive portfolio, which includes a large space programme.
The security division is responsible for tackling air, cyber, land and sea attacks while dedicating the space programme to exploring the universe.
In Q1 2022, Northrop Grumman reported sales of $8.8 billion, dropped 4% compared with $9.2 billion in Q1 2021. In the same period, net earnings reached $955 million, short of the $2.2 billion generated in Q1 2021.
The performance was attributed to the recent global geopolitical events that underscored the relevance of the company’s capabilities.8
Raytheon Technologies
Raytheon Technologies is a multinational company that’s involved in the research and development of products in the aerospace and defence industry. The company’s products and services are available for commercial and government military use, which creates a steady demand.
Renowned for its electrification processes and advanced manufacturing, Raytheon Technologies collaborates with several companies to refine its service delivery. Among some of its offerings, you’ll find advanced aircraft engines, cybersecurity systems, guided missiles, drones and hypersonic weapons technology.
In Q1 2022, Raytheon Technologies generated sales of $15.7 billion, up 3% compared to the same period in the previous year. The net income recorded from continuing operations in Q1 2022 reached $1.1 billion, up 43% compared to Q1 2021.
The numbers were driven by a strong commercial aerospace recovery and focus on operational execution that enabled them to deliver both top-line growth and margin expansion year-over-year (YoY).9
General Dynamics
General Dynamics specialises in building military ships, tanks and armoured vehicles for the US Army. The expertise of the company stretches towards the aerospace industry, marine and combat systems and technologies sector.
The defence company also has an information technology (IT) division that provides tactical analysis for its clients, mission services and strategy using landscape mapping technology.
In Q1 2022, General Dynamics recorded net earnings of $730 million on revenue of $9.4 billion. The performance indicated a 5.2% increase from Q1 2021.10
The chairman and chief executive officer (CEO) of General Dynamics, Phebe N. Novakovic, attributed the performance to aerospace backlog that grew for the fifth consecutive quarter, driven by continued strong Gulfstream demand.10
Additionally, operating discipline and growth in aviation services increased the group’s margins as well.10
Defence stocks summed up
- Defence stocks is a volatile market that’s defined by cyclical trends of high demand when conflict arises, and decline in a moment of peace
- Companies in the defence industry have been impacted differently by conflict around the world, seeing their demand rise leading to the share price going up while supply delays causing the price level to drop
- You should track top defence shares based on how the market is moving, their market cap, performance quarterly before you decide on the company stock you’ll trade
- Technical and fundamental analysis will help to identify entry and exit points in the defence stock market you choose
- Get exposure to the best defence stock using derivative products by trading CFDs and spread bets or take ownership of the equity through investing in ETFs via our share dealing platform
Footnotes
1 Traders stand to lose more than their deposit margin and their loss will exceed their initial deposit when they use leverage. Therefore, it’s important to take steps to manage your risk.
2 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
3 Trade in your share dealing account three or more times in the previous month to qualify for our best commission rates. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
4 New York Times
5 Lockheed Martin
6 The Motley Fool
7 Lockheed Martin
8 Janes
9 The Motley Fool
10 Boeing
11 Northrop Grumman
12 Raytheon Technologies
13 General Dynamics, 2022
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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