The wave of defense stocks is coming: investment opportunities amid rising global defense spending

In recent years, geopolitical conflicts have been intensifying, and defense stocks as investment targets are attracting increasing attention. From the Ukraine situation to Middle Eastern disputes, countries worldwide are collectively increasing their defense budgets. This wave of military modernization has created unprecedented business opportunities for defense-related companies. So, which defense stocks are worth watching? This article will analyze the investment value of global defense stocks in depth and recommend specific listed companies.

Definition and Market Landscape of Defense Stocks

“Defense stocks” broadly refer to all publicly traded companies that provide products or services to the defense sector and military. This includes not only large weapon systems like fighter jets, missiles, and drones but also military communications equipment, electronic warfare systems, maintenance and support services, as well as military uniforms, logistics supplies, and other military materials. Any company whose main customers are the defense department or that has established long-term business relationships with defense agencies can be classified as a defense stock.

In recent years, military technology development has shown a clear shift. Compared to the past reliance on manpower-intensive warfare, modern military conflicts emphasize precision strikes, unmanned operations, information superiority, and technological warfare. This transformation has driven a structural upgrade in military investments, with countries increasing R&D spending on drones, missile defense systems, space warfare capabilities, and other frontier defense technologies. Observations show that major military powers like the US, China, and Taiwan have significantly increased their defense budgets over the past few years, creating a stable and expanding market demand for defense stocks.

Three Core Factors in Choosing Defense Stocks

Many investors tend to oversimplify when evaluating defense stocks, making investment decisions based solely on company names or a single product line. In reality, successful defense stock investments require grasping the following three key factors:

Military Business Proportion is the primary consideration. A company involved in defense but with less than 30% of revenue from military sales will have its stock performance more influenced by civilian business. For example, Caterpillar is often labeled as a defense concept stock, but less than 30% of its revenue comes from military sales; its main business remains heavy machinery. Such companies are more “general industrial” stocks rather than pure defense stocks.

Risks in Civilian Business are equally important. Many defense giants also operate civilian sectors to diversify risk. However, downturns in civilian markets can drag down overall stock performance. Boeing and Raytheon are typical cases: despite stable military orders, issues in their civilian aircraft divisions—such as safety problems, lawsuits, and recalls—have caused significant stock declines, offsetting gains from defense segments.

Technological Leadership and Moats determine long-term investment value. Defense stocks often have much higher technological barriers than civilian tech companies. Due to national security concerns, new entrants require government certification and trust-building, processes that can take years. Established leading defense companies thus enjoy strong competitive advantages, high customer stickiness, and stable order flows.

Leading US Defense Companies: In-Depth Analysis of Five Major Listed Firms

Lockheed Martin (LMT): The Ideal Pure Defense Stock

Lockheed Martin (LMT) is the world’s largest defense contractor, with core businesses including fighter jets, missile systems, and space defense. Its business structure is highly pure, with most revenue derived from government defense contracts, making it the most representative pure defense stock.

Long-term stock performance shows a steady upward trend. Although there have been corrections, these mainly stem from broader market adjustments rather than company fundamentals. As global military spending continues to grow, Lockheed Martin, as a leading player, benefits from the expanding defense market.

Raytheon (RTX): Military Potential Masked by Civilian Challenges

Raytheon (RTX) is among the top five US defense suppliers, with military business including missiles, radar, and electronic warfare systems. However, recent stock performance has been disappointing, primarily due to major issues in its civilian aviation segment.

The company’s aircraft component supply for Airbus A320neo has faced rare metal powder problems that could cause fractures under stress, triggering global inspections and maintenance. It’s estimated that over 350 aircraft may need re-inspection in the coming years, with each repair cycle exceeding 300 days. This directly impacts revenue and exposes the company to lawsuits and compensation claims from Airbus, risking customer loss. While military orders remain stable, the civilian sector’s difficulties have offset positive contributions.

Northrop Grumman (NOC): The Deepest Moat Defense Stock

Northrop Grumman (NOC) is the fourth-largest defense supplier globally and the largest radar manufacturer. Compared to diversified defense firms, Northrop is a quintessential pure defense stock.

It holds core technologies in space defense, long-range missiles, and advanced communications. The company also maintains a proactive shareholder return policy, including stable dividends and a $500 million share buyback plan, reflecting strong profitability and cash flow.

Strategically, Northrop’s cooperation with the US Department of Defense focuses on “strategic deterrence,” leveraging overwhelming military technology and force projection to prevent adversaries’ aggression. As long as major countries continue to perceive security threats, military investments will increase, ensuring long-term growth prospects. Overall, Northrop Grumman is one of the most worthwhile long-term defense stocks.

General Dynamics (GD): A Defensive Choice with Stable Cash Flow

General Dynamics (GD) is among the top five US defense suppliers, with business covering land, sea, and air military systems, as well as civilian jet aircraft (e.g., Gulfstream series).

Although not a pure defense stock, its civilian business offers unique investment value. Gulfstream jets serve high-end markets, with customers less sensitive to economic fluctuations, resulting in relatively stable revenue. Historical data shows that even during the 2008 financial crisis and the COVID-19 pandemic, GD’s profits remained stable—rare in the defense industry.

The company’s shareholder return policy is also attractive: 32 consecutive years of dividend growth, a feat achieved by only about 30 US companies. Most net profits are used for share buybacks and dividends, demonstrating strong commitment to shareholders. While growth potential is limited, GD’s robust cash flow and deep moat make it a preferred choice for conservative defense investors.

Boeing (BA): Defense Potential Drowned by Civilian Storms

Boeing (BA) is one of the largest commercial aircraft manufacturers and a major US defense contractor. Its military products include B-52 bombers and AH-64 Apache helicopters.

Boeing’s difficulties stem entirely from its civilian business. Between 2018 and 2019, the 737 MAX experienced two fatal crashes, leading to worldwide grounding, compounded by COVID-19 impacts, severely reducing profits. Additionally, the competitive landscape has shifted: Boeing historically dominated the commercial aircraft market, benefiting from US and European subsidies and policies. However, China’s COMAC has gained government support, with its C919 aircraft gradually entering international markets, threatening Boeing’s traditional market share.

From an investment perspective, Boeing’s defense segment remains stable, but ongoing issues in its civilian division and market share erosion pose long-term risks. The stock is more suitable for low-entry positions rather than chasing high prices.

New Opportunities in Taiwan Defense Stocks

With the Taiwan Strait situation drawing global attention, Taiwan’s military modernization has become a focus. Over recent years, both China and Taiwan have significantly increased defense spending, creating tangible growth opportunities for local defense stocks.

Thunder Tiger Technology (8033.TW) originally manufactured remote-controlled model aircraft, mainly for toy customers. With explosive growth in the drone market, the company successfully transitioned into a supplier of military drones, becoming an emerging defense stock. Its stock surged significantly in 2022, and as military demand continues to rise, it remains worth monitoring.

Hankxiang (2634.TW) offers a more diversified business model. It operates in both military and civilian sectors, with a balanced risk structure. Civilian operations include aircraft maintenance and parts sales, with “evergreen” characteristics and high customer loyalty; military sales mainly involve trainer aircraft with stable orders. Unlike Raytheon or Boeing, which face difficulties due to product or brand issues, Hankxiang’s diversified business helps maintain relatively stable stock performance. As industry prosperity continues, Hankxiang can benefit from increased military demand and stable cash flow from maintenance services.

Why Are Defense Stocks Worth Investing In? Deep Logic Analysis

As investment master Warren Buffett said, successful long-term investing requires three elements: a sufficiently long growth runway, a deep competitive moat, and a “wet” growth snowball. Defense stocks exemplify these three conditions perfectly.

Endless Market Demand guarantees an ultra-long growth runway. Since human civilization’s inception, conflicts and confrontations among nations have never ceased. Even during peacetime, countries continuously modernize and upgrade their military capabilities. Unlike many industries facing demand saturation and shrinking markets, the defense market’s demand is historically persistent—war is an enduring human activity.

Impenetrable Technological Barriers form a deep moat. Defense industry technologies often represent the forefront of human technological development, with civilian innovations lagging behind military applications. Entry barriers are high: new firms need government security clearances, trust-building, and years of relationship development. Established leading defense companies thus enjoy strong competitive advantages, high customer loyalty, and stable order flows.

Geopolitical Bonuses Drive Growth make the snowball “moist.” Over the past decades, globalization fostered international cooperation and economic integration. Today, the world is entering a phase of “de-globalization” and regional confrontation: US policies promote “reshoring,” geopolitical tensions escalate, and regional conflicts intensify. Under these circumstances, countries must strengthen their defense and military modernization investments. According to defense analysts, global military spending is expected to grow steadily over the next decade, providing continuous demand for defense stocks.

Risks of Investing in Defense Stocks

Despite their long-term value, investors should not blindly chase defense stocks. Key risks include:

Civilian Business Risks: Many large defense firms also operate civilian sectors. Crises such as aircraft safety issues, lawsuits, or increased market competition can significantly impact overall profitability. Investors should analyze each company’s business structure and specific risks in civilian segments carefully.

Political Risks: Defense orders depend heavily on government decisions. Defense budget cuts, disarmament policies, or easing geopolitical tensions could lead to substantial revenue declines.

Regulatory and Litigation Risks: Defense industries face strict government regulation. Product defects often result in major lawsuits and fines.

However, compared to other sectors, defense stocks benefit from highly stable clients—typically governments or military agencies with strong payment capacity—making them less prone to default risks. This stability enhances their resilience against industry downturns.

Investment Recommendations and Summary

For investors seeking long-term value growth, defense stocks offer unique opportunities. Success hinges on “picking the right targets” rather than blindly following trends.

Key evaluation points include: (1) whether military business proportion exceeds 60%; (2) health and risks of civilian segments; (3) core technological advantages; (4) impact of defense budget growth and geopolitical factors.

Overall, pure defense stocks like Northrop Grumman, with focused operations, stable profits, and technological leadership, are ideal long-term investments. Diversified firms like Boeing and Raytheon require careful assessment of civilian sector risks. Taiwan’s local defense stocks such as Thunder Tiger and Hankxiang provide direct opportunities to participate in cross-strait defense upgrades.

Regardless of choice, investors should adopt a long-term holding approach, leverage compound growth, and regularly monitor company fundamentals and industry trends. In today’s complex geopolitical landscape, defense stocks will undoubtedly be a crucial investment opportunity over the next decade.