In this article, we will take a look at the 10 Best American Defense Stocks To Buy According to Hedge Funds.
“Geopolitics can be expected to drive increased defense spending in the years ahead, creating solid investment opportunities,” said Steve Barry, global head of fundamental equity at Goldman Sachs Asset Management, in a midyear outlook report. Around two and a half years ago, the global landscape shifted dramatically due to Russia’s full-scale invasion of Ukraine. This invasion heightened geopolitical tensions and pushed NATO and European nations to reevaluate their security policies after years of relative complacency, recognizing the looming threat on their borders. In October of last year, another pivotal event occurred when Hamas attacked an Israeli music and arts festival, sparking a powerful military response from Israel in the Gaza Strip. These events have further solidified the focus on national security, making it a central issue in political discussions worldwide.
It’s well known that investing in defense contractors tends to pay off when geopolitical tensions rise, but Wall Street sees more driving the latest rally. The recent surge in shares of weapons and aircraft manufacturers, fueled by escalating conflicts in the Middle East, is just part of the story. Analysts point to several other factors poised to push these stocks even higher. These include the Federal Reserve’s easing cycle, the prospect of lucrative contracts for aerospace firms as airlines update their fleets, and the sector’s relatively low exposure to risk from the upcoming U.S. presidential election. While the election outcome remains uncertain, one thing appears likely: regardless of who wins, military spending in the U.S. is poised to increase in 2025 and beyond. Both the Biden-Harris administration and current lawmakers have already demonstrated their willingness to boost defense budgets, with the Senate and House having approved an increase in the 2025 Pentagon budget, which includes additional funding for the F-35 fighter jet program.
On an October 1 episode of CNBC’s The Exchange, Sheila Kahyaoglu, a defense analyst at Jefferies, discussed the impact of Iran’s missile strikes on defense stocks, while also examining U.S. defense spending in the context of ongoing global conflicts, highlighting how these developments could influence the defense sector:
“Investors have been positioned very bullishly, given what the S&P has been doing, making all-time highs several times this year. So, we’re seeing that rotation reversal into the defense names like the Boeings of the world, which have a little bit more data. In terms of the defense budget though, what we’re seeing is a continuing revolution running through fiscal 2025 that starts today. So basically, we’re seeing the can kicked down the road until after the election. Our base case for that, including inflation, is about 3% growth.”
See also: 8 Best Drone Stocks to Buy Now.
In another vein, the space sector is emerging as a vital component of the defense industry’s future. U.S. spending on space-related defense initiatives has surged, with the U.S. Space Force (USSF) requesting $30.1 billion for fiscal year 2024—a 15% increase from the prior year. This upward trend is expected to persist into 2025 and beyond. As the largest user of satellite services in the military, the U.S. Army depends heavily on space-based assets for essential functions such as communication, navigation, weather forecasting, and early missile launch detection.
Photo by Cibi Chakravarthi on Unsplash
Our Methodology
To compile our list of the best American defense stocks, we started by identifying the largest companies in the defense sector. Next, we analyzed hedge fund sentiment for these firms using Insider Monkey’s proprietary database, which tracks 912 elite money managers. We then focused on the stocks that were most widely held by hedge funds and ranked them in ascending order based on the number of hedge fund holders as of Q2 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. L3Harris Technologies, Inc. (NYSE:LHX)
Number of Hedge Fund Holders: 40
L3Harris Technologies, Inc. (NYSE:LHX), a leading American tech firm known for its expertise in surveillance systems, microwave weaponry, and electronic warfare, was formed from the merger of L3 Technologies and Harris Corporation in June 2019.
On October 18, Truist Securities raised its price target for L3Harris Technologies, Inc. (NYSE:LHX) from $250 to $293, maintaining a Buy rating on the stock. The update reflects strong domestic and international demand, which will allow the defense company to increase its 2024 outlook slightly. This optimistic forecast is supported by a projected book-to-bill (B2B) ratio above 1x in Q3 2024. Although margins in Integrated Mission Systems (IMS) and Aviation Reconnaissance (AR) may shrink in the second half of the year due to product mix, there remains upside potential for AR.
Additionally, in August, L3Harris Technologies, Inc. (NYSE:LHX) secured a $587.4 million U.S. Navy contract for tactical jamming pods over the next five years. In Q2 2024, the company saw a 9% rise in non-GAAP earnings per share and reported a significant $32 billion backlog. The acquisition of Aerojet Rocketdyne continues to boost performance, adding about $600 million in Q2 revenue.
As of Q2 2024, 40 hedge funds held positions in L3Harris Technologies, Inc. (NYSE:LHX).
9. Woodward, Inc. (NASDAQ:WWD)
Number of Hedge Fund Holders: 41
Woodward Inc. (NASDAQ:WWD), an American firm specializing in control systems and components for the aerospace and industrial sectors, delivers innovative solutions for aircraft engines, industrial turbines, and power generation systems.
Earlier this July, Woodward Inc. (NASDAQ:WWD) was selected by Boeing to develop advanced hydraulic controls for the X-66 project, a joint effort between Boeing and NASA aimed at creating a low-drag configuration to reduce fuel consumption and emissions in single-aisle aircraft.
Woodward Inc. (NASDAQ:WWD) also announced a quarterly cash dividend of $0.25 per share following its fiscal Q3 2024 earnings report, which highlighted a 6% rise in net sales. The company revised its full-year sales guidance to a range of $3.25 billion to $3.3 billion. Notably, its Aerospace segment posted $518 million in sales for the quarter, an 8% increase year-over-year.
As of Q2 2024, 41 hedge funds held positions in Woodward Inc. (NASDAQ:WWD), according to Insider Monkey’s database.