Two Obvious Plays in the Defense Sector

Andy Snyder|February 20, 2023

The Pentagon sent out a worrisome message last week.

It’s running low on missiles to send to Ukraine. It needs to save a few for itself – you know… to shoot down hobbyist balloons and whatnot.

For investors, this creates what should be an obvious investment opportunity. We need to own the companies making those missiles.

It’s not just missiles that are in short supply, though. It’s just about everything being used to fight the war.

Jens Stoltenberg is the Secretary General of NATO. He sums up the situation like this…

“The current rate of Ukraine’s ammunition expenditure is many times higher than our current rate of production. This puts our defense industries under strain.”

Anytime demand is higher than supply… somebody is making money.

It’s especially true when Uncle Sam stamps “rush order” on his contracts.

Boom!

As you’d expect, there are just a handful of companies that make the things that go boom. BAE Systems (BAESY) is one of them. General Dynamics (GD) is another.

Both play a role in supplying Ukraine with 155-millimeter shells (amongst many other things), for instance. And both will play a key role in helping the Army boost production from 14,000 shells per month today to 20,000 shells by this spring… ultimately topping out at 40,000 shells per month by 2025.

If we look at the full product catalogs of these companies and others like them, we can see broad increases in spending across the board. In fact, many reports put the buildup at a level that hasn’t been seen since the Korean War.

It’s good news for investors who are looking for a conservative way to beat the S&P 500. Defense sector plays will almost certainly do it. And they’ll do it with far less risk than other plays with similar return potential.

Since Russia first fired on Ukraine, shares of General Dynamics are up 8%. It’s a modest gain, but it’s come during a time when the broad market has dropped by 9%. BAE Systems (which also plays a big role in getting tanks to the war zone) is up a sizeable 32%.

Better yet, each pays a dividend that’s closing in on 3%.

It’s almost always a good time to buy a defense sector giant.

But when the economy is on the ropes and the folks in charge are excited to feed a go-nowhere proxy war as a form of stealth stimulus… it’s an especially good time to buy one.

Defense stocks will go higher.