Global tension isn’t going away anytime soon.
By Josh Enomoto, InvestorPlace Contributor
Although the novel coronavirus has occupied our attention for over the last year and a half, it’s also important to realize that the pandemic is but one of many escalating crises. With no end to the tension in sight, it’s probably time to consider adding defense stocks to your portfolio. While cynical in nature, this is all about banking on what is, not what should be.
First up, of course, is ice-cold tensions between the U.S. and China. Primarily, the focus centers on the Chinese government’s handling of the Covid-19 pandemic (or lack thereof). According to a Washington Post report, a World Health Organization scientist tasked with investigating the origins of the coronavirus claimed that Chinese colleagues pressured him to drop the controversial lab-leak theory. Frankly, such assertions are only going to boost defense stocks.
As the world’s second-biggest economy, China commands global respect. At the same time, the Chinese government has upset the international community, with unfavorable views of the country reaching historic highs. Not helping matters is that just prior to the Covid-19 breakout, the administration of former President Donald Trump attempted to cool tensions, only to aggravate them once the health crisis got out of control. With no sign of abating, defense stocks are where you want to be.
Second, China is not the only hotspot in the world. As you know, North Korea is always a thorn in everyone’s side; the hermit nation alone can spark a rally in defense stocks to buy. Additionally, not everything is centered on the U.S. For example, Israel has discovered a surplus of natural gas, which it can potentially export. But that will inflame tensions with Russia, which has been a vital energy partner.
Therefore, it’s not out of the realm of possibility that tensions could rise between Israel and Russia driven purely by economic necessity. To loosely paraphrase a scene from the film Lord of War, nobody’s lining up to buy Russian cars. While terribly dubious and cynical, it’s just reality.
These defense stocks will likely be relevant for years to come:
- Lockheed Martin (NYSE:LMT)
- Raytheon Technologies (NYSE:RTX)
- Huntington Ingalls Industries (NYSE:HII)
- Booz Allen Hamilton (NYSE:BAH)
- Elbit Systems (NASDAQ:ESLT)
- Kwesst Micro Systems (OTCMKTS:KWEMF)
- Patriot One Technologies (OTCMKTS:PTOTF)
Also, defense stocks aren’t just levered to international conflicts. We have plenty of problems here at home, which can escalate into an inferno. In some cases, it already has. Therefore, if you can rid yourself of the bad taste, this segment offers some interesting possibilities.
Defense Stocks to Buy: Lockheed Martin (LMT)
An oldie but a goodie, Lockheed Martin isn’t exactly having a great year. So far in 2021, LMT stock is only up by a bit over 1%, which is hardly inspiring. As well, on a trailing-year basis, Lockheed shares find themselves printing red ink to the tune of almost 8%. Still, if you’re reading between the geopolitical lines, this is one name you don’t want to ignore.
Representing the front line in terms of our air superiority network, Lockheed develops the best fighter jets in the world, including the much-discussed F-35 Lightning II. Capable of multi-tiered operations, the F-35’s flexibility is what will be highly desired in the battlefronts of tomorrow, particularly as warfare becomes more asymmetric and unpredictable.
Even if the U.S. doesn’t find itself in another hot conflict, our military forces will always need airworthy warcraft to send our adversaries a message. This is particularly relevant domestically as President Joe Biden’s critics level accusations about the president’s leadership capabilities.
While LMT hasn’t been the best performing among defense stocks, this one just needs time to find its catalysts — of which there are many.
Raytheon Technologies (RTX)
Perhaps best known for its Tomahawk cruise missiles, Raytheon Technologies has always been at the forefront of military innovations. With the aforementioned weapons system, for instance, our naval forces can strike targets with precision, limiting unnecessary collateral damage. Most importantly, these systems keep our servicemembers from harm’s way.
Further, Raytheon offers a diverse range of battleground solutions. With tensions again flaring up in Afghanistan as the Taliban rapidly takes over the country, it’s now more important than ever for command and control systems to direct military resources effectively and efficiently — an area in which Raytheon specializes.
Should tensions escalate into another full-scale ground invasion of Afghanistan, the defense contractor also stands ready with mission support platforms, including the V-22 Osprey. While we can hope for the best, RTX stock is poised to rise higher if circumstances turn out for the worse.
Also, Raytheon isn’t an exclusive member of defense stocks. Thanks to its aviation ecosystem business, the company provides several consumer-level solutions, including airport biometrics systems to help move lines along — certainly a relevant sector in this day and age.
Defense Stocks to Buy: Huntington Ingalls Industries (HII)
Since approximately 71% of the Earth’s surface is covered by water, any nation that has superpower ambitions must have a strong navy. First, a robust maritime force is one of the best ways to project power. Second, a powerful fleet provides protection for commercial activities at sea.
Everyone knows that if you mess with American ships, you may get a surprise visit from operators of the Naval Special Warfare Command. And undergirding the U.S. Navy is Huntington Ingalls Industries, the largest shipbuilding company in the U.S. and as a result, one of the most important defense stocks to buy.
For decades following the collapse of the Soviet Union, the U.S. was the sole superpower. It still is, but our adversaries China and Russia would like to change this framework. Particularly, China’s navy has enjoyed tremendous growth while Russia’s navy — which had a poor reliability reputation — is significantly improving. Therefore, it’s imperative that the U.S. responds, and that only means good things for HII stock in the long run.
Also vital to our security infrastructure is the Coast Guard, which Huntington Ingalls supports as well. According to the United Nations, worldwide drug use has been rising, which spells more demand for ships to intercept such threats.
Booz Allen Hamilton (BAH)
Specializing in cybersecurity and cloud-computing innovations for businesses, government and military clients, Booz Allen Hamilton is easily one of the most relevant defense stocks to buy. That’s because hot conflicts have become somewhat anachronistic in what some might term Cold War 2.0. Today, our adversaries are levering a tremendous asymmetric impact utilizing cyberwarfare tactics.
As a Forbes article published in January 2020 described it, “Cyberwarfare Will Explode In 2020 (Because It’s Cheap, Easy And Effective).” Honestly, I couldn’t have said it better myself and not only that, contributor Steve Andriole was correct. By the end of the pandemic-disrupted year, Russian agencies infiltrated several components of American infrastructure, emphasizing just how vulnerable we really are.
Therefore, when you’re assessing your options regarding defense stocks, you don’t want to exclusive focus on just tanks, planes and warships. Instead, cybersecurity has become exponentially more crucial, which plays into Booz Allen Hamilton’s hands.
As well, it’s not just our armed services that require digital protection. As the Colonial Pipeline cyberattack demonstrated, anybody can fall prey to nefarious agents online, imposing severe societal and economic shocks.
Defense Stocks to Buy: Elbit Systems (ESLT)
If you want to buy defense stocks that are situated where the action is, you don’t need to look any further than Elbit Systems. Headquartered in Haifa, Israel, Elbit — which specializes in drones and military technology solutions — has long been a go-to equity unit to consider, especially when flareups in the Middle East occur.
Over the trailing month, ESLT stock is up double digits as tensions from the long simmering Israel-Palestine conflict boiled over, resulting in a very chaotic and troubling time for all parties involved. About the only thing that can be said about this circumstance is that defense stocks have offered a vital hedge for investors seeking cover.
Moving forward, Elbit Systems and other Israeli defense firms will likely enjoy upside due to the aforementioned discovery of hydrocarbons. As if the Holy Land needed any more conflict, the natural resources that are potentially at Israel’s disposal will almost certainly cause international conflict.
It’s not just that the country won’t have to import said resources — they can export it too, which will really anger the Russians. Therefore, keep a close eye on ESLT stock.
Kwesst Micro Systems (KWEMF)
For the last two defense stocks to consider, I’m going to dive into the speculative side of the segment. While you may have tremendous upside potential with these names, you’ll also risk incredible volatility and unpredictability. Therefore, if you’re a conservative investor, you’ll want to pick from the aforementioned companies.
But if you can handle the heat, Kwesst Micro Systems may be worth putting on your radar. An innovator of various weapons and crowd control systems for military and law enforcement applications, Kwesst’s products serve various needs. Whether an operator needs a safe, effective means of neutralizing enemy targets or to provide electronic cover for friendly forces, the company is on the cutting edge of defense-related solutions.
In particular, I’m intrigue by Kwesst’s low energy cartridge, which provides an inexpensive, non-lethal but effective projectile firing platform for law enforcement agents. With societal tensions between communities at perhaps an all-time high, an incident involving a fatality — whether justified or not — can create massive problems.
While non-lethal projectiles have their issues as well, they’re far superior alternatives to lethal platforms under present circumstances.
Defense Stocks to Buy: Patriot One Technologies (PTOTF)
Admittedly, I’ve been talking about Patriot One Technologies over the last few months with little to show for it in terms of upside performance. Nevertheless, for battle-hardened speculators interested in defense stocks, PTOTF is worth considering for its everyday underlying relevance.
By that, I mean Patriot One’s core business of covert weapons detection solutions — this covers both firearms and non-projectile weapons like knives — is much-needed in the present societal climate. Obviously, with the coronavirus pandemic, the extended lockdowns and resultant economic stresses have pushed many people over the edge. While cynical, people want protection, and Patriot One can provide it.
Further, in April of this year, Reuters reported that the U.S. government “arrested two Yemeni men on a terror watchlist in separate incidents as they crossed the border with Mexico illegally.” To be fair, we don’t know how prevalent the problem of terrorists entering the U.S. through the southern border is. But suffice to say, it’s a serious risk. Through its artificial intelligence-based threat detection system, Patriot One can significantly mitigate the damage, potentially saving innocent lives.
Of course, when shares are trading hands at below half a buck, there’s usually a reason for it. Nevertheless, the ramp up in relevance could see PTOTF outperform in the years ahead.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.