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The world is a scary place right now. We have been dealing with terror groups for years and tensions with other countries like North Korea are high. Many people are worried about war and other conflicts. As an investor, the best thing you can do is invest in defense stocks.
When I talk about defense stocks, I am referring to stocks that do business with the military. I am not talking about defensive stocks that are good hedges to own when the market drops.
But with that said, defense stocks in general tend to do well when there is uncertainty in the world and the stock market. And it only helps when President Trump asks for an increase in military spending to the tune of $54 billion.
#1. Lockheed Martin Corporation (NYSE:LMT)
Lockheed Martin is the granddaddy of defense stocks and the company and stock have been performing incredibly well the past few years. However, when Lockheed reported its recent earnings, there was a red flag.
First-quarter sales grew by 7% and profit margin held at 10%. However net income fell by 15%. Part of this decrease was due to the sale of their ISGS business. When you take that out of the picture from last year’s earnings, net income fell only 5%.
Still, having net income decrease at a time when business should be booming is a concern. The question is, is it a large enough concern to make you not invest in the stock?
My feeling is that Lockheed Martin is still a good stock to invest in long term. With the increase in military spending, the stock should hold up well. And the 3% dividend the company pays helps too.
#2. Raytheon Company (NYSE:RTN)
Raytheon is another defense stock that does a lot of business with the military. Primarily they deal with missile defense systems and build sensors and components for weapons systems.
Over the past 5 years, Raytheon has grown earnings by 7%. In their most recent earnings release, they did $6 billion in quarterly sales, which is 3% more than the same time last year. They also improved their operating profit margin to 12% and their net profit margin to 8%. Earnings per share increased by 21%.
Overall, the outlook for Raytheon is bright. They are growing the business and don’t have any of the issues that Lockheed Martin has.
If you are on the fence between the two, I would pick Raytheon.
#3. Heico Corporation (NYSE:HEI)
Heico is not a pure defense stock in the sense that it works primarily with the military. Heico designs, manufactures and distributes generic replacement parts for airplane engines and components and part of this is with the military.
I included it in this list because it does deal with the military and the stock has been on fire. The company recently reported an increase of 12% in sales, a net income increase of 31% and diluted earnings per share of 28%.
For 2017, Heico expects to continue to improve margins and grow even more. How do they do this? They have perfected a 3-step approach.
They are able to grow organically, they have been acquiring other smaller firms that meet their strict requirements and they have been able to keep costs in line. When you can execute in all 3 areas, you are going to quickly grow your business. And this is what Heico has been doing and should continue to do.
Defense stocks outperformed the market in 2016 and many are saying they cannot continue to trade at these high valuations. I disagree. These companies are making money and growing earnings and as a result, investors will want to own a piece of them.
Add to this the uncertain times we live in and it only makes sense that investors flock to safer stocks to protect their money. Investing in defense stocks achieves this goal.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.