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Like it or not, defense stocks have always been an important sector of the market. Some might make the argument that it’s the most important segment. Essentially, while the subject is controversial, free societies must establish mechanisms to keep honest people honest. The threat of extreme violence is what has kept the peace. But that paradigm may soon change.
I really laid out the case for defense stocks in a TipRanks article I wrote recently. Essentially, a strong case can be made that Donald Trump and the Republicans have an easy road to the White House (and perhaps other seats of power). And because the so-called MAGA conservatives favor an isolationist foreign policy, U.S. partners are sweating bullets.
Where the matter gets especially murky is that Trump constantly talks about peace. The word aligns with basic Christian theology, likely in a bid among Republicans to court evangelicals. However, reasonable people understand that sanctification cannot precede justification.
Isolationism of the MAGA variety reverses this established narrative – and that’s what has global partners freaked out. The only “good” that can come out of it is potential profitability of these defense stocks to buy.
Lockheed Martin (LMT)
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One of the biggest defense stocks in the world, Lockheed Martin (NYSE:LMT) is really in the spotlight right now. Just recently, the company disclosed blowout earnings for the second quarter. While analysts presently rate LMT stock as a consensus hold, that might change over the next several days. Further, if Donald Trump is elected to a second term, demand for Lockheed’s defense solutions could skyrocket.
What has international partners worried is Trump’s broadcasting of isolationist sentiments. Not too long ago, he bemoaned that Taiwan doesn’t do enough to support its own defense. At the same time, the former president accused the island nation of basically grabbing the entire share of the burgeoning semiconductor ecosystem. Now, reports are coming out that many Taiwanese favor boosting defense spending.
It’s going to have to considering that China has its eyes on it. Further, if the U.S. goes through with a hands-off policy, then Taiwan may have to defend itself. After all, under this contrarian framework, a little bit of violence should be allowed to prevent excessive violence.
Honestly, I’m not sure what that means. However, it does seem cynically positive for LMT and other defense stocks.
Huntington Ingalls (HII)
Source: Wirestock Creators / Shutterstock.com
Even with an isolationist policy – assuming that Trump wins in November – the U.S. cannot afford to shirk its unofficial responsibilities. Sure, the populist movement (ala former Congressman Ron Paul) decries foreign intervention. Here’s the problem: if the U.S. doesn’t impose its hegemony on others, then other countries will eagerly fill the power gap. And that’s what brings us to Huntington Ingalls (NYSE:HII).
Huntington Ingalls is a defense contractor specializing in maritime solutions. Basically, if you want to invest in the U.S. Navy, you acquire shares of HII stock. That’s about as close as you can get. Most importantly, all great powers project their strength through the high seas. In this case, China’s naval ambitions present a huge threat to the U.S. and global democracies.
Almost certainly, this framework will lead to significant growth in Huntington sales over the next several years. Even with Trump’s populist and isolationist message, presumably no American politician can survive a deliberate acquiescence to the Chinese. It’s just not going to happen, especially because of our heated economic rivalry.
So, forget about the day-to-day financials. Instead, I’d look to HII as one of the defense stocks to consider for the long term.
AeroVironment (AVAV)
Source: Pavel Kapysh / Shutterstock.com
When it comes to AeroVironment (NASDAQ:AVAV), the catalyst for the business is a kinetic motivation. In contrast, Lockheed Martin and Huntington Ingalls represent more strategic investments; that is, their core products represent a show of power that may prevent/discourage war. Should conflicts go hot, these weapons systems would be ready to go. In AeroVironment’s case, the core product essentially assumes a hot conflict.
That’s because AereoVironment specializes in unmanned drones that loiter in the air, seeking out targets. When a human operator that is miles away from the shooting spots a target, the drone slams into it, causing damage or outright destruction. AeroVironment became sort of a household name thanks to its tremendous success in Ukraine.
In the years ahead, I anticipate company sales to soar – and that’s especially the case under a second Trump administration. An isolationist policy essentially green lights dictators to see what they can get away with. And then said dictators can profit from their warmongering because the White House would push for “peace.”
Threatened democracies would be on notice: protect yourself because America is staying home. That’s bad for stability but good for defense stocks like AVAV.
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.comPublishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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. Tweet him at @EnomotoMedia.
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