The defense business is booming, but you wouldn't know it from looking at the stocks.
Coming into Tuesday trading, shares of 10 major defense contractors Barron's looked at-including Lockheed Martin, Northrop Grumman, Huntington-Ingalls Industries, and others-were down an average of 17% since fighting started in Iran. Only RTX and General Dynamics were up. Both have commercial aerospace businesses that are attracting investors.
Investors might want to revisit the sector. Higher spending on missiles is a tailwind for defense shares that isn't going away any time soon. U.S. defense spending is at a record high, European defense spending is growing, and the Iran war is teaching the American military how to build more autonomous weapons systems and smart munitions.
The stock market, however, is forward-looking, and investors worry that spending growth could slow, especially if Democrats retake the House of Representatives in the 2026 midterm elections. The risk feels real, and it's overwhelming the hope for rewards derived from the U.S. government's drive to increase missile production.
Missile defense and munitions replenishment are "key megatrends driving unusual growth rates across defense stocks," wrote Citi analyst John Godyn on Monday. Based on awarded contracts, he expects U.S. missile production-including Patriot interceptors and THAAD (Terminal High Altitude Area Defense) interceptors, standard missiles used across the military, Tomahawk cruise missiles, and more-to reach more than 6,000 a year within the next few years, up from roughly 2,500 a year currently.
"We think even defense bulls (not many of them out there yet) under-appreciate the ultimate tailwind as international demand is further layered on top of domestic demand across missile/munitions portfolios," added Godyn.
More missile business benefits missile makers, including RTX, Lockheed Martin, and Northrop Grumman. It also benefits suppliers of parts, such as L3Harris Technologies, Honeywell Aerospace, Ducommun, Moog, Curtiss-Wright, Mercury Systems, and others.
Of those nine companies, Godyn rates shares of Northrop, RTX, Ducommun, and Lockheed as Buy. He rates Curtiss-Wright stock Hold. He doesn't cover Moog, Mercury, or Honeywell Aerospace. His L3Harris rating is suspended.
Of the latter four, 68% of analysts who cover L3Harris rate shares Buy. The average Buy-rating ratio for S&P 500 stocks typically ranges from 55% to 60%. The Buy rating ratios for Moog and Mercury are 80% and 73%, respectively. Only 33% of analysts rate Honeywell Aerospace as Buy. That stock has been weak since it was spun out of Honeywell in June.
Of the five stocks Godyn rates, only Lockheed has a below-average Buy-rating ratio, with 42% of analysts rating shares Buy. The average ratio for Curtiss, Northrop, and RTX is north of 70%.
So, there you have nine missile-related ideas for getting back into the defense industry, and now could be the right time to do so. Godyn pointed out recently that defense stocks typically sell off in the spring ahead of midterm elections and then rebound in early fall, a pattern that mimics a smile.
"This year [is] very much on pattern," he wrote. Defense stocks rebounded somewhat after second-quarter earnings. "We believe there is more to go-in other words, defense stocks are likely to keep smiling."
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