- Tensions between the US and Iran are steadily rising with Americans now ordered to leave Iraq.
- Defense stocks are now looking increasingly attractive as chances of a military conflict rise.
- But even without a war, a record US military spending is enough fuel to propel defense stocks upwards.
The chances of a military conflict between the world’s sole superpower and Iran or its proxies in the Middle East have risen sharply. This follows the killing of the leader of the Islamic Revolutionary Guard Corps’ Quds Force Gen. Qassem Soleimani by US forces.
Iran has vowed revenge over the killing which took place in Baghdad, Iraq. The increasing tensions have seen the US embassy in the Iraqi capital order Americans to leave the Middle Eastern country “immediately”.
While a debate on whether a war is necessary could go on endlessly without a resolution, there is no doubt that US defense stocks, just like oil stocks, stand to benefit in case of a military conflict. For US defense stocks, this would be a double blessing following last year’s boost to military spending.
War or no war, defense stocks will have a blast
Congress last year gave a historic boost to the US defense budget expanding it to a record high of $738 billion. This was a gain of 3% from the previous year’s $717 billion. Traditionally, defense stocks tend to outperform the market during periods of budget growth.
Not all defense stocks are created equal though and some could prove to be better than others for investors. Here are three stocks that even without the risk of an all-out war between the US and Iran will fare well, according to analysts.
#1. Textron Inc
Textron Inc (NYSE: TXT) is best known for the Bell range of military choppers but it also produces military munitions. So far, Textron has received six BUY ratings and zero SELL ratings from the Wall Street analysts providing coverage for the stock.
Having closed Thursday’s trading session at $45.48, investors could enjoy a 22% gain if analysts’ projections materialize. Its average stock price target is $55.31.
Textron boasts a market cap of slightly over $10 billion while its P/E ratio is 12.45.
#2. L3Harris Technologies Inc defense stock
L3Harris Technologies Inc (NYSE: LHX) was born out of a merger between L3 Technologies and Harris Corporation six months ago. This resulted in the world’s sixth-biggest defense contractor. L3Harris, which supplies diverse products and services to the US military boasts of 14 BUY ratings and zero sell ratings.
For investors L3Harris provides a potential upside of 21% based on the average stock price target of $246.61. The defense stock closed Thursday at $203.31 and a market capitalization of 44.94 billion. L3Harris’ P/E ratio stands at slightly over 25.
#3. Kratos Defense & Security Solutions Inc.
As a defense contractor, Kratos Defense & Security Solutions Inc. (NASDAQ: KTOS) specializes in unmanned systems, satellite communications, missile defense and directed-energy weapons. Among the Wall Street analysts who cover the defense stock, Kratos Defense & Security Solutions currently boasts of seven BUY ratings and zero sell ratings.
With the average stock price target being $23.60, this represents a potential gain for investors of 28%. The stock closed Thursday’s trading session at $18.42.
Compared to other better-known defense stocks such as Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC) whose P/E ratios fall under 20, Kratos Defense & Security Solutions is not cheap, though. The defense contractor which boasts a market cap of a little under two billion dollars has a P/E ratio of 139.
Last modified: September 23, 2020 1:27 PM