How to choose military stocks? Leading military industry giants worth paying attention to and investment strategies

The current global geopolitical situation is tense, regional conflicts are frequent, and countries’ defense expenditures continue to rise. The underlying logic is simple—modern warfare emphasizes technology, information, and precision strikes rather than human wave tactics. The rise of new weapons such as drones, precision missiles, and information warfare has created long-term growth opportunities for a number of defense stocks. For investors, the key challenge is how to accurately select among numerous military industrial companies.

What are military stocks and arms stocks?

Military stocks (or arms stocks) generally refer to publicly listed companies whose products or services are related to national defense, covering a broad range. From small items like military water bottles and uniforms to large systems like fighter jets and missile systems, any company that supplies directly or indirectly to defense departments can be classified as a military stock.

In a broad sense, as long as a company’s clients include government defense agencies, or its upstream suppliers have business dealings with the defense department, the company has military industry attributes. This also explains why some companies that seem “not really” military companies are included in the military stock category.

Since the outbreak of the Russia-Ukraine conflict, global perceptions of the military industry have shifted. Cases where small countries effectively resist larger powers have made governments realize the importance of technological investment. Therefore, major military powers are increasing investments in precision-guided weapons, drone systems, and cyber defense, aiming to achieve maximum effectiveness with minimal casualties. Against this backdrop, military budgets are soaring, and arms companies are benefiting accordingly.

What should you pay attention to before investing in military stocks?

Although military stocks tend to perform well in the long term, not all companies labeled as “military” are worth investing in. The key is to look at two indicators:

First, the proportion of military business. If a company’s military revenue accounts for only 10-20% of total revenue, with most of its business still in civilian products, its stock price may not fully benefit from military industry dividends. For example, Boeing is one of the top five U.S. arms suppliers, but its civilian aviation business is the main revenue driver. Difficulties in the civilian market often drag down its overall stock price.

Second, whether the product lineup aligns with future demand. Modern military needs are changing rapidly—while the number of ground troops in many countries is expected to remain stable or decline, investments in air force and navy technologies are increasing. This means traditional ground equipment orders may slow, while demand for aerospace, missiles, and communications in high-tech fields continues to grow. Investors need to assess whether the company’s product lines match this trend.

In-depth analysis of leading U.S. military industry companies

Northrop Grumman (NOC): A leading pure military stock with advanced technology

Northrop Grumman (NOC) is the fourth-largest global defense manufacturer and the world’s largest radar producer. Compared to other military companies with diversified businesses, Northrop is a typical “pure military stock,” with revenue highly concentrated in defense.

The company’s competitiveness stems from its long-term accumulation in high-tech fields. The current U.S. military strategy centers on “strategic deterrence”—demonstrating overwhelming technological superiority to dissuade adversaries from military adventures. This involves cutting-edge areas like space reconnaissance, long-range missiles, and military communications, where Northrop is a leader.

Financially, the company is profitable and has increased dividends for 18 consecutive years, reflecting stable cash flow returns. This year, Northrop accelerated its $500 million share repurchase plan to maintain shareholder value. Due to the high entry barriers in defense technology, concerns about the relative lag of U.S. defense capabilities drive long-term investment interest. As one of the most technologically fortified defense companies, Northrop is worth watching.

Lockheed Martin (LMT): A stable growth leader in military stocks

Lockheed Martin (LMT) is the largest defense contractor globally, focusing on missile systems, aerospace, and defense electronics. Its portfolio includes flagship projects like the F-35 fighter jet, making it one of the most important arms stocks worldwide.

From a technological perspective, LMT possesses top-tier defense R&D capabilities, with products covering core military needs of the U.S. and allied nations. Its stock has shown a long-term upward trend since listing, with fluctuations mainly due to broader market adjustments rather than deteriorating fundamentals. From a long-term holding perspective, LMT is a military stock with sustained growth potential.

Raytheon Technologies (RTX): A troubled company to watch

Raytheon (RTX) is also one of the top five U.S. arms suppliers, involved in missile systems, defense electronics, and aerospace. However, in recent years, the company has faced significant challenges, with weak stock performance in 2023 mainly due to issues outside its core defense business.

Specifically, Raytheon supplies a special powder metallurgy component for Airbus A320neo aircraft, which has a risk of cracking under high pressure. As airlines accelerate procurement of new aircraft to meet rising travel demand, this defect could lead to the long-term grounding of 350 aircraft for quality inspections, with each repair cycle potentially taking 300 days. This not only severely impacts Raytheon’s civil aviation business but also exposes it to large lawsuits from Airbus and customer loss risks.

While Raytheon’s defense orders remain stable, risks in its civilian business are eroding profits. Investors should wait until these issues are fundamentally resolved before considering an entry.

General Dynamics (GD): A stable dividend-paying defensive stock

General Dynamics (GD) is one of the top five U.S. arms suppliers, covering all military branches—navy, army, and air force. Unlike pure defense companies, GD also has civilian business—its Gulfstream private jet division provides revenue diversification.

This diversification is an advantage. Even during the 2008 financial crisis or the 2020 COVID-19 pandemic, GD’s profits remained relatively stable because the high-end civilian aircraft market is less sensitive to economic cycles. Its business breakdown is approximately 25% civilian, 23% navy, 22% national security information, 18% weapon systems, and 12% mission services.

Although its revenue growth is not as spectacular as some high-tech firms, GD achieves steady profit growth through meticulous cost management and the long lifecycle of military equipment. The company has increased dividends for 32 consecutive years, a rare feat among U.S. companies. This stability makes it a preferred choice for defensive investors.

Boeing (BA): A potential bottoming opportunity amid civilian difficulties

Boeing (BA) is one of the two major global civil aircraft manufacturers (the other being Airbus). As a top U.S. arms supplier, Boeing produces key military equipment like the B-52 bomber and Apache helicopters.

However, Boeing’s stock price plummeted mainly due to setbacks in its civil aviation business. Between 2018-2019, the 737 MAX experienced two fatal crashes, leading to worldwide grounding; then the COVID-19 pandemic further slashed orders and deliveries. Additionally, new competitors are emerging—Chinese commercial aircraft manufacturers, supported by government backing, are beginning to challenge in the global market.

From an investment perspective, Boeing’s defense business is growing steadily, but the outlook for its civil aviation segment remains uncertain. It is more suitable to wait for further declines before considering a bottom-fishing entry rather than chasing a rally.

Caterpillar (CAT): The true face of a pseudo-military stock

Caterpillar (CAT) is often classified as a military stock, but its actual military revenue accounts for less than 30%. Its main business remains construction machinery. The reason it’s labeled as a “military stock” is because its products are useful in post-war or disaster reconstruction.

Many similar companies exist—FedEx, which has contracted military mail transport; some manufacturers of water bottles or military shoes, whose main clients are defense departments, are also categorized as military stocks. This highlights the importance of investors thoroughly understanding a company’s actual business composition rather than relying solely on labels.

Opportunities in Taiwanese arms stocks

The geopolitical importance of the Taiwan Strait is increasingly recognized, with both sides boosting defense budgets. This creates new opportunities for local Taiwanese defense companies.

Thunder Tiger Technology (8033.TW) was originally a remote-controlled toy manufacturer. With the rapid rise of the drone market, the company successfully transitioned into the defense industry. Its stock surged significantly in 2022, reflecting market optimism about its military prospects.

Hanshyn (2634.TW) has a business structure similar to Boeing, covering both defense and civilian sectors. Its civilian business mainly involves aircraft maintenance and parts sales, while its military focus is on trainer aircraft. Compared to Boeing and Raytheon, which face difficulties due to single-product or brand issues, Hanshyn’s diversified business provides better risk resistance. As industry demand increases, its maintenance and repair services are expected to grow, leading to relatively stable stock performance.

Why are arms stocks worth long-term attention?

Looking at global trends, military stocks have three major long-term investment advantages, aligning with core value investing principles.

First, the industry runway is long. Human history has never seen a true end to conflicts. While the forms of conflict evolve, the core need for military forces—continuous enhancement of defense capabilities—is eternal. This means the defense industry will not face “industry decline” risks and has a very long growth cycle.

Second, the moat is deep enough. Entry barriers in the defense industry are extremely high. Cutting-edge technologies are mostly developed in labs and military settings; civilian tech often originates from military innovations. Moreover, defense procurement involves national security considerations, with governments preferring to work with trusted suppliers. This dual barrier of technology and trust makes it difficult for new entrants to displace established defense giants.

Third, growth drivers are strong. The world is entering an era of regionalized politics, with rising trade barriers and increasing national investments in defense. This trend is expected to continue for a long time. As long as there is no large-scale “disarmament” (which is currently very unlikely), the growth potential of arms stocks remains assured.

Investment advice and summary

Overall, military stocks are indeed promising long-term investment targets, but investors must recognize a key issue: not all companies labeled as “military” are worth investing in.

When choosing, focus on: How high is the company’s military revenue proportion? Does its civilian business face risks? Does its military field align with future demand? Only when these questions are satisfactorily answered should one consider establishing a long-term position.

Examples like Raytheon and Boeing teach us that even if military orders increase, deterioration in other business areas can cause stock prices to plummet. Therefore, deep research into a company’s financial structure, industry position, civilian market dynamics, and global geopolitical trends is essential for making wise investment decisions.

In the long run, selecting pure, well-protected, profit-stable defense industry leaders for holding generally yields more steady returns than blindly chasing hot topics.