After a sell-off on Thursday, Nov. 14 the street seems to be betting on the defense stocks again. This comes as the conflict in the Middle East escalates and geopolitical tensions ratchet the payoffs for the stocks in this sector.
What Happened: As defense stocks become lucrative with rising tension, David Wagner, portfolio manager at Aptus Capital Advisors says that "this is more than just a geopolitical play." He sees further upside in the defense and aerospace areas, despite current rich valuations, as per a Bloomberg report.
As per the Benzinga Pro data, the S&P 500 Aerospace & Defense Industry Index has risen by 15.33% year-to-date, whereas Lockheed Martin Corp (NYSE: LMT), Rtx Corp (NYSE: RTX) and iShares U.S. Aerospace & Defense ETF (NYSE: ITA) have all outperformed the index at 17.26%, 39.09% and 20.09%, respectively in the same period.
On a 15-year basis, Lockheed Martin has surged 603.08%, outperforming the iShares U.S. Aerospace & Defense ETF, which rose 521%. Another notable up move was seen in the shares of Northrop Grumman Corp (NYSE: NOC) which have zoomed by 2,806% since its listing in May 2015. During the same period, S&P 500 has risen 436%, while S&P 500 Aerospace & Defense, which started in 2012, gained 321.57%.
Why It Matters: Defense stocks, also known as haven assets, are comprised of two major sub-groups - defense and aerospace - offering investors a relatively diversified profile. While some analysts think geopolitics will tick the share prices higher, others argue their higher valuations.
Historically, defense spending runs in decades-long cycles. Investment in the sector experiences periods of growth followed by downturns, and we may be nearing the peak of the current cycle, according to Goldman Sachs analyst Noah Poponak.
"The defense budget is at an all-time high, which creates difficult comparisons and challenging base effects," the analyst said in a note published Friday.
Key Risks For Defense Stocks As Per Goldman Sachs
- Peak Spending: The defense budget is hovering at historical highs, making future growth difficult.
- Geopolitical Shifts: If major conflicts ease, defense spending could decline.
- Government Debt: U.S. debt-to-GDP ratios are near record levels, increasing pressure to curb federal spending.
However, a few analysts like Cole Wilcox, portfolio manager at Longboard Asset Management said, "Unfortunately we are in a cycle of high and growing conflict around the world. This is driving increased demand for defense spending that is likely to persist for a very long time."