Introduction

Defense stocks are stocks that have to do with the military, armies, weapons, war and ministries of defense. They are therefore not defensive stocks, which denote stable companies (such as Unilever, Procter & Gamble or Coca-Cola).

Shares in such companies are certainly not suitable for everyone, e.g. there may be fundamental reasons not to invest in companies that make their money from war and weapons. The same applies to so-called “sin stocks”, i.e. companies that have to do with sins and vices. These can be companies whose business model is cigarettes, alcohol or casinos. Here, each investor must decide for himself and work out with his conscience what he can invest in with a clear conscience.

Defense stocks play a special role. You can argue about it, but there is hardly any other country where the military plays such an important and central role. In economic terms, they also provide hundreds of thousands of jobs in the private sector. And it’s no secret that the USA in particular benefits from the odd war or conflict. In such a case, the share prices of such companies rise sharply across the board. So you can be sure that this sector will never run out of work and orders. Defense stocks are also relatively crisis-resistant. Of course, defense spending is also cut during a recession, but the powerful lobby of these companies should not be underestimated. This means that these companies are also suitable for diversification to a certain extent. Moreover, contrary to popular opinion, it hardly matters whether the Democrats or Republicans, hardliners or compromisers are in power. The arms and military lobby bends every US president because they are often systemically relevant. One example would be Boeing, which has an influential civilian division (aviation) in addition to its military division.

I will briefly introduce you to some of these companies here, some of which are certainly well-known, while others are quiet players that prefer to remain in the background and are relatively unknown, especially outside the USA. So if you’re interested in this sector, you’re sure to get some new ideas.

Boeing (Ticker: BA)

The classic par excellence. Of course, most people know it for its commercial jets, and (as of June 2020) it is still in serious financial trouble due to the tragic events with the 737MAX.

However, Boeing also has a considerable share of military equipment, which is used by all types of troops. Well-known products include the F/A 18 SuperHornet, helicopters of all kinds such as the Chinook or Apache, submarine-hunting aircraft and other support jets for surveillance, nuclear bombers and other strategic long-range aircraft, as well as a considerable number of weapons systems and missiles on land, at sea or in the air. Boeing is therefore extremely broadly positioned and can be regarded as systemically relevant for the USA and therefore under special protection by the US government.

General Dynamics (Ticker: GD)

GD also has a civilian division, best known for the luxurious Gulfstream jets. Militarily, GD is also a giant, producing a large part of the US Navy fleet. This includes destroyers such as the ultra-modern stealth destroyer Zumwalt, but also lighter combat ships, e.g. for the US Coast Guard, or other types of support vessels such as supply ships of all kinds. Even more important, however, is the submarine sector, such as the current Virginia and Columbia classes, which form the backbone of the USA’s nuclear submarines.

Armored vehicles are also an extremely important part of General Dynamics, in this case the main tank of the US armed forces, the Abrams. In contrast to Russia, which has an enormous number of models in its ranks, the USA is much more modest here. Of course, the Abrams is constantly being further developed, especially in terms of modern combat management systems and armor.

Northrop Grumman (Ticker: NOC)

NOC produces widely-known combat drones such as the Global Hawk, and just as expensive a development as the F-35 is the B-21 strategic long-range stealth bomber, which is intended to replace Boeing’s dinosaur B-52. The B-2 bomber also comes from the forge of Northrop Grumman. Another classic that has long been “in the portfolio” is the A10 Thunderbolt, also known as the Warthog (due to its unusual shape).

NOC also manufactures support systems on land (vehicles, electronic systems, command and control systems), as well as missile defense and satellite systems.

Raytheon / United Technologies (Ticker: RTX)

Raytheon and United Technologies merged in 2020 to form a new weapons giant (ticker formerly RTN and UTX, now RTX). The main branch is certainly missile defense systems, where Raytheon is the main supplier to the US armed forces. The Tomahawk missile is probably best known here. RTX is also a leader in electronic warfare and radar systems.

Particular attention is now being paid to hypersonic missiles, which are designed to fly at several times the speed of sound. Of course, Raytheon also offers missiles and torpedoes.

The company is also active in the civilian sector, for example with Pratt & Whitney aircraft engines, which are also used in commercial jets. With Collins Aerospace, which develops avionic systems and all other technical systems for aircraft in the civil and military sector (power, cabling, cabin entertainment, cockpit equipment, etc.). And, of course, like most others, it also manufactures satellite systems, again in civil and military versions.

Particular attention is now being paid to hypersonic missiles, which are designed to fly at several times the speed of sound. Of course, Raytheon also offers missiles and torpedoes.

Lockheed Martin (Ticker: LMT)

This company has been in the headlines for several years, and not always in a positive light. The reason is the enormously expensive developments that LMT charges the US Air Force for. Not only that, but the technical problems with their aircraft have also generated a lot of negative publicity. Lockheed Martin is the manufacturer of the F-35 multirole fighter jet. A jack of all trades, so to speak. Critics complain that this jet can do a lot, but nothing really. Although the jet has already flown in combat missions, the enormous complexity of its design makes it prone to errors (it can take off vertically, for example). There are still considerable teething troubles, and the promised unit price was far too high for a long time because the required quantity could not be delivered and therefore the advantages of mass production were not sufficiently effective.

In addition, there is the F-22 fighter jet from Lockheed Martin, as well as Black Hawk combat helicopters, drones of all kinds and Sikorsky helicopters, which are mainly used in the civilian sector (heavy transport), but also offer some models for passenger transportation. Other successful models include the F-16, probably the most widely used fighter aircraft in the world, which is still being modernized and is an “evergreen” and is used by countless air forces worldwide. Equally well-known are the C-130 Hercules air transporter and the Galaxy.

However, LMT is enormously advanced and probably the market leader in missile systems of all kinds, and here too, development is moving in the direction of laser systems and hypersonic missiles.

LMT is also leading the way in maritime capabilities with the AEGIS system, which defines the standard for many NATO partners as a weapon system at sea.

Conclusion (Part 1)

This concludes the overview of the Big 5. Here is the 5-year chart with the performance of the individual stocks. Please note that Raytheon does not appear over the entire timeline due to the 2019/2020 merger with United Technologies. The crash of Boeing (737MAX debacle, Covid19 crisis with collapse of the commercial aviation sector) is striking. The disappointing performance of General Dynamics also stands out in comparison to its competitors. However, you can also see that the stocks often move in parallel, as they are sold/buyed as a package by large funds, so to speak.