Back in February and March 2020, aerospace and defense stocks were in freefall. Suddenly, instead of symbolizing the speed and connectivity of the modern economy, the whole of the aviation industry ground to a halt. Even the military was put in a bind as soldiers often live and work in close quarters. The advent of a COVID vaccine further deepened the divide as some in the Armed Forces chose to be discharged rather than be inoculated.
Likewise, many seething geopolitical rivalries faded into the backdrop as the international community focused on combating the threat of the coronavirus. Now that much of the world has returned to some semblance of normal, air travel has picked up dramatically from its 2020 lows, according to data from the U.S. Bureau of Transportation Statistics.
Also, prior geopolitical rivalries flared up again, which incentivizes military-related spending. Below are the best aerospace and defense company stocks to watch out for this year as you invest.
Quick Look at the Best Aerospace and Defese Stocks:
- Lockheed Martin
- General Dynamics
Thanks to the intersection of national security interests and the drive for economic competition, the best aerospace and defense stocks historically provide an excellent arena for buy-and-hold investors to grow their portfolios.
Unfortunately, the COVID-19 crisis proved that very few sectors could avoid the initial volatility associated with a once-in-a-century pandemic. At the same time, defense contracts never stop, and these contracts have a massive impact on the stock market. As defense contracts are awarded, defense firms see increases in both cash flow and stock prices. This means that aerospace stocks and defense companies are constantly changing in valuation. Their receivables, while massive, are still subject to change. Government contracts could go to the competition and defense spending could be reallocated at any time.
Plus, Wall Street can see strength in a particular industry, be it the technology side or the manufacturing side. Investors know how much government spending is expected from these firms, and that often impacts everyone’s trading strategy.
Nevertheless, the U.S. and the global community came together to manufacture and distribute a vaccine in record time. With a return to normalcy comes economic opportunities, along with a resurgence of old rivalries, both boding cynically well for aerospace and defense stocks.
Overview: Aerospace and Defense Stock
As one of the most competitive and lucrative market segments, aerospace and defense stocks fundamentally offer investors a double dose of profitability potential. First, the aerospace industry transformed the 20th century, enabling people to travel great distances at unprecedented speed. As we progress along the technological spectrum this century, aerospace firms are aiming even higher. For instance, experts believe that space tourism will become a $1.57 billion industry by 2028. This doesn’t even count military spending, which is always quite high.
Second, investors can readily bank on the relevance of the defense component of the aerospace market. No matter how humanity progresses, the conflict appears inevitable — and there may be plenty of it. As the world’s sole superpower, the U.S. has a unique responsibility to project power and deter adversarial or belligerent actors from undermining American interests and that of U.S. allies.
Further, because of a transition in power in Washington, D.C., and the stark shift in leadership culture, a few nations appear to be testing the Biden administration. Therefore, it’s possible that defense spending could increase to counteract such high-level shenanigans, which may bode well for aerospace and defense stocks. Additionally, Deloitte reports that U.S. allies such as Japan are beefing up their security profile, potentially providing additional revenue streams for American defense contractors, especially as the defense budget continues to rise with inflation.
Finally, the COVID-19 crisis initially imposed what appeared to be crippling volatility among aerospace and defense stocks. Logically, with billions of people around the world practically forced into quarantine, airplanes sat parked on tarmacs. Not only was that devastating for commercial airliners, but the aerospace industry also suffered steep losses in product and service revenues.
However, with the return of consumers wanting to make up for lost time, the defense sector could see a revival. Contract awards to firms like Northrup Grumman and United Technologies can easily drive up the gross domestic product.
Best Online Brokers for Aerospace and Defense Stock
Though you may find a few exceptions to the rule, aerospace and defense stocks tend to be well-capitalized and deeply established blue-chip names. Given the complex nature of the business, along with its mission-critical profile, the industry features a high barrier to entry. Therefore, you usually don’t have to worry about an upstart competitor ruining your portfolio.
Further, the tough-to-crack aerospace sector enables you the freedom to choose your online broker based on your lifestyle and preferences. With the best aerospace and defense stocks on this list mostly being household names, any brokerage will carry their equity units. To help you decide, below are the best online brokers for the aerospace and defense industry.
Features to Look for in Aerospace and Defense Stock
- Balanced pipeline: When assessing aerospace and defense stocks, the latter portion invariably draws the most attraction — fighter jets offer more pizzazz than commercial jetliners. Nevertheless, the most successful companies in this sector have found a healthy balance between commercial and military applications. This balance may become even more important in the future as defense budgets could find themselves under pressure from fiscal and political headwinds.
- Track record: In the defense industry, no greater honor exists than repeat business. If particular weapons and security systems work well, military and government agencies will continue requesting them. Similarly, if commercial aerospace entities consistently satisfy consumers and clients, they too will provide repeat business. Therefore, when figuring out which aerospace and defense stocks to buy, consider a heavier allocation toward companies that have a strong track record and brand reputation.
- Robust financials: Although robust financials is an attribute that investors should consider for any equity sector category, it’s particularly important for aerospace and defense stocks. For one thing, this market subsegment is capital-intensive. Second, no one knows for sure how the COVID-19 pandemic will ultimately play out. For example, consumer fears could linger, which may pose challenges on the commercial side. But companies with strong balance sheets can ride out the pain longer than others.
- Obvious connections to the military: When you invest in companies like Raytheon Technologies, Lockheed Martin Corporation (which is developing the F35 fighter jet), Collins Aerospace(a subsidiary of Raytheon), Archer Aviation (which is developing air taxis that could prove useful in forward areas), Rocket Lab USA, Northrup Grumman Corporation (which develops the B-2 and B-21), etc., you can see the obvious connection to military spending.
- Strong supply chain: When you invest in a defense business, supply chain issues are common. Remember, everything from air mobility to a random equipment manufacturer can slow a big contract. Airplane production takes time, and while contract announcements are exciting, there’s never an end-date on those announcements. Keep your eye on manufacturers of aircraft components like Spirit Aerosystems, stock returns across the sector and even what hedge fund holders are doing so that get the “big picture”.
Fly the Friendly (and Unfriendly) Skies for Serious Gains
In many ways, aerospace and defense stocks represent an intriguing contradiction. Invariably, the defense component draws much controversy because of its underlying product’s deadly effectiveness. On the other hand, military innovations have the propensity to improve civilian applications.
From the investor’s point of view, aerospace and defense stocks offer a 2-for-1 approach. During bull markets, the aerospace component enjoys substantial demand as people travel around the world. In times of geopolitical tension, the defense angle can hedge an investor’s portfolio against certain risks. Therefore, this sector is always worth consideration.
Frequently Asked Questions
Aerospace and defense stocks are shares in companies that are in the air or defense industries.
Because the airline industry is making a comeback, aerospace and defense stocks are considered a good investment.
Check out the list by Benzinga above that outlines the best aerospace and defense stocks.