To The Moon

The war between Russia and Ukraine has not yet ended, and the Palestinian-Israeli conflict has been re-ignited, making the world more and more unstable.

Last Saturday, the Palestinian militant group Hamas, which controls the Gaza Strip, raided Israel, killing hundreds of people. Israel then declared war and began retaliatory air strikes. Us send warships to Mediterranean, and Biden said he would provide "all appropriate assistance" to Israel.

Analysts believe that the Palestinian-Israeli conflict may drag other Arab countries into the war, and a new round of war in the Middle East is imminent.

The more chaotic the world, the more benefit the defense industry. Us defense stocks exploded yesterday, of which $Northrop Grumman(NOC)$ rose 11.4%, $Lockheed Martin(LMT)$ and $General Dynamics Corp(GD)$ rose more than 8%, $Raytheon Technologies Corporation(RTX)$ rose 4.6%.

Will the Israeli-Palestinian conflict be the trigger for a surge in defense stocks?

In the long run, the performance of defense industrial stocks is relatively outstanding, such as Raytheon has risen by an annualized rate of about 5.7% since 2000, Lockheed Martin 13.28%, Northrop Grumman 13.1%, and General Dynamics 9.6%. All exceeded $DJIA(.DJI)$ 's 4.57% annualized increase:

In my opinion, there are two reasons for the long-term excellent performance of the defense industrial:

First, the competition in the defense industry is limited. For example, Lockheed Martin is the manufacturer of the F-35 fighter, with a unit value of about $150 million. There is no competitor for this kind of aircraft in the world.

Second, the military expenditure of the United States and other countries has increased over a long period of time. As the only purchaser of military products, the higher the military expenditure, the more money military enterprises can make. Therefore, in the long run, defense industry is an industry without ceilings:

Although the outlook for the industry is good, defense stocks have obvious periodicity. For example, after the September 11, 2001, the United States launched the war in Iraq in 2003, which lasted until 2011. During this period, both Lockheed Martin and other defense enterprises made a lot of money.

After the end of the Iraq war, defense spending shrank under the impact of the US debt ceiling, and the revenues of defense enterprises stagnated until an upward inflection point was reached after 2017:

Looking to the future, as the war between Russia and Ukraine hurts the European powers, the struggle between China and the United States is becoming more and more fierce, and both Germany and Japan have planned to increase defense spending, which is undoubtedly good for defense industrial stocks.

However, due to the impact of the US debt ceiling and inflation on the profitability of defense enterprises, defense stocks have performed poorly this year. Lockheed Martin fell by more than 10% this year, and without the stimulation of the Israeli-Palestinian conflict, the decline would be as high as 18%. This is far worse than the 0.6% rise of the Dow Jones Index this year.

From the perspective of valuation, the earnings ratio of the defense stock market has declined after the correction, but it is still in a slightly higher position. Therefore, the trend of the Israeli-Palestinian conflict will have a greater impact on stock prices, considering the disparity in strength between Hamas and Israel.

If no other Middle Eastern countries join the war, the upward space for defense stocks may be limited, investors had better wait patiently for a more batting area: