US, Allies Strike ISIS: 3 Defense Stocks to Buy Now
The U.S., along with five Arab countries, initiated airstrikes Monday night against the Islamic State of Iraq and Syria (ISIS). The strikes specifically targeted ISIS groups in Syria and escalated a military campaign in a country where a civil war, which is now in its third year, has provided the militant group with a secure base of operations.
Widening Military Operations
Fighter aircraft, including bombers as well as Tomahawk cruise missiles, were used in the strikes. This is part of the widened military campaign authorized by President Obama around two weeks ago. The objective of these strikes is to throw into disarray and eliminate militants of the Islamic State.
These militants have killed thousands of individuals and beheaded several people from Western nations. This includes a British aid worker and two journalists from the U.S. ISIS has also gained possession of large portions of Syria as well as significant territory in northern and western Iraq.
Defense Stocks Gain
Defense contractors have gained steady ever since the ISIS conflict began featuring prominently in the news. These stocks have exceeded the performance of the broader market by a wide margin and some of them have touched all-time highs. Lockheed Martin Corporation (LMT), General Dynamics Corporation (GD), Raytheon Company (RTN) and Northrop Grumman Corporation (NOC) achieved record highs on Friday. They have also exceeded the S&P 500’s performance by a wide margin since August.
Additionally, several Republican lawmakers have recently said that some of the planned reductions to the budget of the Department of Defense may have to be reversed. These cuts are a result of sequestration, intended to forcibly reduce federal government expenditure.
Will Gains Continue?
Some market watchers are of the view that an increase in the military budget has already been priced in by the market. Taking into consideration the gains in stocks over the last two months, stocks may not rise further. Additionally, there is some skepticism that a conflict with ISIS may not cost the U.S. anything close to what was spent on the second Gulf War.
However, the defense industry usually gains during any conflict. This is borne out by the performance of stocks during the first Gulf War as well as the conflict with the Taliban in Afghanistan following the 9/11 attacks.
Additionally, defense stocks provide relatively higher dividends. Dividend yields for Northrop Grumman and Raytheon exceed 2% while yield for Lockheed Martin is nearly 3%.
Our Choices
Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.
Lockheed Martin Corporation is the largest defense contractor in the world. The company’s customer base includes the U.S. government, foreign governments, and other commercial buyers. The company operates through the following five businesses: Aeronautics, Information Systems & Global Solutions, Missiles and Fire Control (MFC), Mission Systems and Training (:MST) and Space Systems.
Lockheed Martin holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 3.1%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 15.94.
General Dynamics Corporation engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company operates through four segments: Information Systems & Technology (IS&T), Combat Systems, Marine Systems and Aerospace.
The company currently holds a Zacks Rank #2 (Buy) and has expected earnings growth of 7.1%. It has a P/E (F1) of 17.01x.
Northrop Grumman Corporation supplies a broad array of products and services to the U.S. Department of Defense (DoD), including electronic systems, information technology, aircraft, space technology and systems integration services. Currently, the company operates under four reporting segments. The company is based out of Falls Church, VA.
Apart from a Zacks Rank #2 (Buy), Northrop Grumman Partners has expected earnings growth of 19.3%. It has a P/E (F1) of 14.03x.
It is likely that the conflict with ISIS will continue for a while. Such a campaign is likely to provide impetus for defense stocks in the days and weeks ahead. These stocks would make excellent additions to your portfolio.
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