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Stocks  | September 19, 2019

Remarkably, the Trump administration has not yet started a war despite multiple geopolitical flash points. On top of the ongoing trade war with China, the U.S. must contend with a number of tense situations. Therefore, defense stocks are particularly relevant now.

Initially, this may sound like a strange statement to make. After all, even the most bullish investors will concede that this market rally has overextended itself. Thus, we should welcome a correction to work out some of the excess optimism. Under this environment, the best stocks to buy feature protective elements, such as strong track records of dividend payouts.

Obviously, defense stocks primarily take the term protection quite literally. But even though President Trump — who is typically aggressive with his word choice and blunt with his delivery — is uncharacteristically quiet about certain geopolitical situations, don’t mistake that for an immediately peaceful resolution. We have many problems that will require a big stick, and perhaps the capacity to wield it.

For instance, the situation in Iran may soon reach a fever-pitch. Trump opted to hit the country with economic sanctions in response to Iran downing an American military drone.

But in response, Iranian President Rouhani called the White House “mentally handicapped.” Outraged, Trump threatened to obliterate parts of Iran if they attacked any more American assets. That is just begging for an uptick in defense stocks.

Iran is just one of several geopolitical flashpoints. And behind each one looms Russia, supporting interests antithetical to our own. Again, this situation is begging for a defense-industry rally. Here are the 10 best stocks to buy in this sector:

Lockheed Martin (LMT)

Several factors support the robust lift in Lockheed Martin (NYSE:LMT) shares this year. But one of those factors is that among defense stocks, Lockheed Martin represents the military’s front face. Most folks are familiar with the company’s F-35 Lightning II. However, Lockheed is the backbone for America’s squadrons of fighter jets, bombers, and multi-functional aircraft.

At this stage, many may feel it’s vital for the U.S. to show some muscle, which in turn benefits LMT stock. First, the U.S. has lost significant credibility on the world stage.

Our sudden weakness in foreign policy isn’t without consequences. Surely, it has inspired Russia to throw its weight around, realizing the penalties for belligerence is minimal. Thus, I like LMT stock to rise higher.

Northrop Grumman (NOC)

Although seemingly less celebrated than Lockheed Martin in the public space, Northrop Grumman (NYSE:NOC) is no lightweight. In fact, Northrop is one of the most critical defense stocks to buy due to its highly guarded proprietary technologies. That attribute will play a key role, especially in this atmosphere.

One of the reasons why I like NOC stock for the long haul is its upcoming B-21 Raider stealth bomber jet. According to the company’s information, the B-21 can penetrate the toughest air defenses and strike targets anywhere in the world. The idea that a precision payload can arrive at someone’s doorsteps should be a significant deterrent.

Ultimately, that’s a net positive for NOC stock.

Boeing (BA)

It’s easy to forget that Boeing (NYSE:BA) is actually one of the best stocks to buy in the defense industry. Right now, the main focus is how the company will navigate the minefield that is the Boeing 737 Max jetliner. After two fatal crashes linked to the aircraft’s faulty software, BA stock took a beating.

But with each passing day, the controversy fades slightly more into the background. Eventually, like most controversies involving publicly traded companies, the 737 Max will become a footnote. Right now, though, BA stock is an undervalued play in the defense sector.

In addition to the B-1B Lancer, Boeing manufacturers the F-15 and F/A-18 Super Hornet, which the Air Force and Navy deploys, respectively. Although these two fighter jets don’t generate headlines like the advanced F-35, they’re considerably cheaper. If we dive further into a conflict, resources will be limited.

Thus, Boeing is still very much relevant among defense stocks.

Raytheon (RTN)

A key reason why no nation has attacked the U.S. in modern times is its ability to respond from anywhere. Among defense stocks, that attribute is no more emblematic than in shares of Raytheon (NYSE:RTN).

Famous for the Tomahawk cruise missile, Raytheon leads in offensive weapons capabilities.

However, so much has changed in the military space since the Tomahawk came out. With our adversaries making significant progress in electronic warfare, it’s imperative that Raytheon also take the lead in defensive technologies. They’re doing exactly that with their Next Generation Jammer Mid-Band, or NGJ MB.

When it becomes operational in 2022, the NGJ MB will allow our aircraft to fly deeper into enemy territory. This allows our forces to establish air superiority, deliver weapons payloads, and support the troops on the ground.

Raytheon’s comprehensive approach to defense makes RTN stock an easy buy.

Huntington Ingalls Industries (HII)

Naval warfare is as old as war itself. Nevertheless, it is still one of the most relevant and crucial components of our armed forces.

Whenever a foreign conflict breaks out, the U.S. Navy can respond with alarming speed thanks to its unprecedented fleet. But to keep this pace up requires ships, and that’s where Huntington Ingalls Industries (NYSE:HII) and HII stock comes in.

As America’s largest military shipbuilding company, Huntington Ingalls is easily one of the defense sector’s best stocks to buy. Several naval warships are aging badly, requiring multiple replacements. HII stands to benefit significantly from the order stream. Indeed, they’re backlogged with requests, which is naturally positive for HII stock.

Also, this is a great opportunity to show some love for the U.S. Coast Guard, which HII also serves. The overlooked maritime service, the Coast Guard directly defends our territorial waters. Thus, their operations are intricately linked to our overall security umbrella.

TransDigm Group (TDG)

In some ways, defense stocks are glamorous investments. Whenever a conflict breaks out, the underlying companies’ products are on full display in the national news media.

That said, one of the best stocks to buy within the broader security network is TransDigm Group (NYSE:TDG). Hardly a household name, TDG stock likewise doesn’t get much airtime. It should, though, as shares are up over 40% year-to-date.

If further tensions arise, expect TDG stock to build off this rally. That’s because TransDigm operates in the background, specializing in seemingly mundane aerospace components, such as pumps, valves, and actuators. Not exactly Tom Clancy material, I concede.

However, it’s these small details that keep our military machinery running. It’s one of the reasons why the U.S. is a superpower.

Leidos (LDOS)

Currently, most defense stocks are kinetic. What I mean is that their underlying “products” deliver brute-force impact on both hard and soft targets. From a purely guttural level, nothing gets the point across more than a kinetic response.

However, the warfare of tomorrow will increasingly shift toward the digital realm. This is actually a more sinister pathway, allowing military forces to conquer societies without leveling infrastructures; thus, they can use said infrastructures for their own good. It’s a terrifying scenario, one that Leidos (NYSE:LDOS) helps to ensure we stay on the right side of.

Simply from a technical point of view, LDOS stock is one of the best stocks to buy anywhere. On a year-to-date basis, Leidos shares have gained over 50%. More impressively, the ride up is almost linear.

So what makes LDOS stock so compelling? Leidos has many specialties, including cybersecurity. Cyberwarfare represents one of the easiest ways for our enemies to wreak havoc. To prevent this, Leidos deploys next-generation threat assessment and response measures.

Booz Allen Hamilton (BAH)

For defense stocks to stay relevant, the underlying organizations must address the threats of tomorrow. What keeps the military brass up at night is not necessarily the kinetic threat, as we previously mentioned. Instead, it’s the digital realm that could render the most damage without shedding any blood.

The reason why cyber-threats are so worrisome to our security forces is that they’re often asymmetric. Under the kinetic framework, we have an obvious adversary: the Kremlin, which wages war against us online.

It sounds like science-fiction but it’s becoming a frightening reality. To ensure that we stay above this next-gen threat, Booz Allen Hamilton (NYSE:BAH) deploys an offensive cybersecurity platform. Rather than wait for a threat to strike, this system actively hunts them down.

Consequently, BAH stock is one of the best stocks to buy in the defense arena. On a YTD basis, shares are up over 50%.

Kratos Defense & Security Solutions (KTOS)

Iran’s downing of an American military drone — with conflicting reports about where it happened — may well go down as the catalyst for a new Middle Eastern conflict.

But in the future, this embarrassing incident may become a relic of a bygone era. That’s because companies like Kratos Defense & Security Solutions (NASDAQ:KTOS) are developing the next wave of advanced drones. Unlike prior iterations, these drones will carry offensive payloads: in other words, they have the ability to punch back, deterring any shenanigans.

What will drive KTOS stock higher is the company’s XQ-58 Valkyrie. Small and nimble, the Valkyrie can carry a 550-pound payload. Better yet, they’re designed with economy in mind. Therefore, these drones can achieve air superiority with minimal cost and no loss of life (for our service members).

Olin (OLN)

As I mentioned above, defense stocks will increasingly focus on digital threats. However, that doesn’t mean the kinetic element will go away. It’s not just a matter of imposing our will on belligerent states. Rather, the kinetic approach is usually the cheapest.

That’s why I don’t think you should ignore organizations like Olin (NYSE:OLN). A chemicals specialist, OLN stock has significant exposure to the defense industry. Earlier this year, the U.S. Army awarded Olin with an $85 million contract to provide small-caliber ammunition.

Although that’s small potatoes, I expect Olin to consistently pick up these types of contracts. Relatively speaking, small-caliber ammunition is dirt cheap to produce. Also, with the company’s Winchester brand, they can service the consumer market as well.

Considering that we have more guns than people in the U.S., that’s a strong incentive to buy OLN stock.

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