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Stocks  | June 5, 2020

Many sectors that have traditionally been favorites of investors have been upended in recent years. In the wake of the novel coronavirus pandemic, some of these may never recover. Retail was already in trouble before coronavirus lockdowns shuttered stores. Unless your name is Amazon (NASDAQ:AMZN), survival mode is now the name of the game. The oil industry? A price war combined with cratered demand for gasoline and jet fuel has hammered oil stocks.

Pandemics, trade wars, rogue states, social unrest — none of these seem to keep defense stocks down for long. In fact, in times of crisis, demand for the products produced by many companies in this sector actually increase.

Here are seven defense stocks you can rely on to keep performing in virtually any situation:

  • TransDigm Group (NYSE:TDG)
  • Northrop Grumman  (NYSE:NOC)
  • Lockheed Martin (NYSE:LMT)
  • Mercury Systems (NASDAQ:MRCY)
  • Aerojet Rocketdyne (NYSE:AJRD)
  • BWX Technologies (NYSE:BWXT)
  • Leidos Holdings (NYSE:LDOS)

Not certain about whether to invest in a company that produces deadly weapons? No worries, there are options here that let you take advantage of defense industry performance without being directly involved with weapons systems.

Defense Stocks to Buy: TransDigm Group (TDG) 

Although resilient, defense stocks can still be impacted in the short term by market panic to a crisis like the coronavirus pandemic. That’s exactly what happened to TransDigm. It was heading to 200% gains over the past five years before the panic over the new virus began. TDG stock dropped from a close above $655 in mid-February before dropping to $245.79 on March 18. That was a loss of 63% in a single month.

Now at $469, TransDigm is in recovery mode. This is a slower rate of recovery than some other defense industry stocks. The reason is TransDigm’s aftermarket aircraft part business. It’s taking a hit with so many commercial airplanes grounded. The business will bounce back — planes always need parts — but it will take time before commercial airlines are flying near pre-pandemic levels again.

Therefore, some patience may be required for TransDigm. However, its high-margin business of supplying parts for military aircraft including the AH-64 Apache helicopter and F-16 fighter jet will remain lucrative.

And of the estimated 63,000 commercial and military planes globally that use parts from TransDigm, the company says it is the sole available source for 80% of the parts it sells. That reliance bodes well for the long-term prospects of this Cleveland-based aerospace company.

Northrop Grumman (NOC)

Northrop Grumman is a giant among defense stocks, with revenue of over $30 billion and a market cap of over $23 billion. The company produces a huge range of weapons and military technology, ranging from small caliber ammunition, to guided missiles and hardened electronics. Well-known weapon systems coming from Northrop Grumman factories include the Minuteman III intercontinental ballistic missile, the A10 Thunderbolt II (Warthog) and the B-2 stealth bomber. NOC has also been active in the aerospace industry, including manufacturing spacecraft launch vehicles.

In other words, Northrop Grumman has a military pedigree, and is a player in every branch of the U.S, military. It also brings in big international revenue, to the tune of $4.4 billion in 2018.

NOC stock was also hit by the market meltdown in March. If you factor that drop out of the equation, Northrop Grumman had posted a 191% gain over the past five years. That’s down considerably now, of course, but the drop makes the current $436.21 price very attractive for long-term investors.

Lockheed Martin (LMT)

Lockheed Martin is a company that virtually everyone recognizes. This is the world’s largest defense firm by sales, bringing in $44.9 billion in revenue in 2017 from arms sales. LMT stock reflects that lofty position. Prior to March and the coronavirus-fueled market selloff, the value of LMT shares had increased by 132% over the previous five years. The company currently has a market cap of $109.5 billion, even after the coronavirus effect.

Lockheed Martin produces some of the best-known American weapon systems, including the F-35 fighter jet. The most expensive weapon in Pentagon history, F-35 sales have been on the rise. Last October, the Pentagon inked a contract for delivery of 478 of the jets at a cost of $34 billion. In March, Lockheed Martin sold another $4.7 billion worth of F-35s to the Air Force, Marines and Navy. International sales are also up, including a $4.6 billion dollar deal with Poland signed in January.

With China making aggressive moves, Iran coming into conflict with the U.S. in the Gulf, Russia continuing to raise hackles in Europe and the Arctic and North Korea still testing missiles, the market for Lockheed Martin’s weapons and defense systems will continue to be strong in the foreseeable future.

Mercury Systems (MRCY)

I like Massachusetts-based Mercury Systems. The company is focused on electronics rather than direct development of weapons. Its components are used by over 25 different defense contractors, on some 300 projects. This strategy really helps to spread the risk, dealing with dozens of different contractors instead of several defense departments. Should sales of a big-ticket weapon system be paused, MRCY stock has little exposure.

The company started small in 1981, but over the past two decades it has been expanding influence through a series of acquisitions. In the latest, last fall, Mercury Systems spent $100 million to buy American Panel Corporation — a company specializing in ruggedized display technology.

Mercury Systems’ approach has proved itself this year. MRCY stock did take a plunge in March, but it quickly recovered, then gained ground. MRCY is now up an impressive 38% so far in 2020. Over the past five years, it has followed an upward trajectory, gaining 531%. That’s the kind of growth that makes it an A-rated stock.

Aerojet Rocketdyne (AJRD)

California-based Aerojet Rocketdyne has proven that it can adapt to the times, and it has staying power. After all, it started in 1915 as the General Tire and Rubber Company.

Focused on rockets since the 1940’s, the company’s propulsion systems have been a key component of some 1,600 rocket launches. These include Apollo 11. Its engines played a critical role in getting the Curiosity Rover to Mars. The company also plays a part in national defense. It’s part of Northrop Grumman’s Ground-Based Strategic Deterrent program for the U.S. Air Force. 

Yes, AJRD stock has been hit by the panic over the coronavirus. No, I don’t expect that damage will be long-term. It’s showing encouraging signs, gaining nearly 14% since mid-May. 

Before being caught up in the coronavirus market panic, ARJD had posted 172% growth over the past five years. There has been real acceleration starting in 2019, reflecting the renewed U.S. focus on the space program. Look for AJRD stock to bounce back from the coronavirus hit, and continue in growth mode.

BWX Technologies Inc (BWXT)

This Virginia-based company is focused on nuclear power. Its business includes commercial applications (such as manufacturing nuclear steam generators) and defense applications, including providing nuclear reactors for U.S. aircraft carriers and submarines.

The current focus on green energy has many environmental groups re-thinking nuclear power. In 2018, Richard Rhodes, a Pulitzer prize-winning author and visiting scholar at Harvard, MIT, and Stanford University wrote of nuclear power: “Far from being the Devil’s excrement, nuclear power can be, and should be, one major component of our rescue from a hotter, more meteorologically destructive world.”

Any move toward nuclear power as a means to dramatically cut carbon emissions is a win for BWXT stock. Even if that doesn’t happen, the company has a thriving business manufacturing radioactive isotopes for medical use and servicing existing nuclear reactors. And then there are the orders for nuclear propulsion systems for the expanding fleet of U.S. Navy submarines and aircraft carriers.

Prior to March, BWXT stock was up 191% over the past five years. At just over $62, the stock is closing on its 2020 high close of $70.43 on Feb. 20. And there’s no reason to think it will stop there.

Leidos (LDOS)

The final entry on my list of defense stocks you can count on is Leidos. This may not be a household name, but investment analysts know it: not counting what happened to markets in March, LDOS stock gained 189% over the past five years. It has bounced back quickly from March as well, gaining 48% over the past 10 weeks or so for 6% overall growth so far in 2020.

Any stock that is in positive territory this year deserves a closer look. Leidos is a technology focused company. It uses that tech across four key markets: 

  • Civil (including home and business power modernization and FAA flight management)
  • Defense (intelligence-driven cyber security, intelligence analysis and geospatial analytics)
  • Health (Health IT provider with scalable solutions for hospitals and every health-focused U.S. federal agency)
  • Intelligence (Artificial Intelligence solutions for enterprise and national defense)

There’s a lot to like on that list. And every one of those markets is poised for continued growth. That puts LDOS stock in a good position, even if the coronavirus pandemic did cause it to stumble for a few months.

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