In this article, we will take a look at the 10 most undervalued defense stocks to buy according to hedge funds.
The Russian invasion of Ukraine and President Biden’s pledge to continue helping Ukraine against the Russian aggression have provided a strange boost to the defense sector, where spending seems to keep gaining momentum despite inflation worries for the rest of the industries.
According to Bloomberg, Mary Ann Bartels, chief investment strategist at Sanctuary Wealth, who has a positive outlook on the market based on her view that the broader market will start gaining momentum in the second half of 2023, believes any “pullback in the coming weeks and months will be an opportunity to buy.” The analyst specifically favors aerospace and defense stocks.
“Immune to Economic Shock”
Increasing geopolitical tensions made the defense sector virtually immune to the broader market turmoil unfolding in 2022. A Bloomberg report in May 2022 cited Richard Aboulafia, a managing director with consultancy AeroDynamic Advisory, who said the following on the outperformance of the defense sector relative to the market:
“You’re immune from economic shock, because the market for defense goods bears no relation to commercial demand for anything in the civil economy.”
Some of the most notable US defense stocks that are gaining in this backdrop are Lockheed Martin Corp (NYSE:LMT), Northrop Grumman Corp (NYSE: NOC) and Howmet Aerospace Inc (NYSE: HWM).
Defense companies in Europe are also enjoying surging profits as major powers of the continent come to terms with the reality of the Russian threat and resolve to brace for the future in terms of military preparedness. BAE Systems PLC, Saab and Kongsberg Gruppen ASA have recently posted their 2022 numbers which show positive effects of the increasing military spending in Europe. A WSJ report published in February quoted McKinsey estimates which suggest that military spending in Europe will increase a whopping 53% to touch $481 billion in 2026 from 2021.
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Our Methodology
For this article, we first used the Finviz stock screener to identify stocks from the aerospace & defense category which have PE ratios under 35, which is much lower than the industry PE average of 53 as of February 27. From the long list of the stocks in the resultant dataset, we picked 10 pure-play defense stocks with the highest number of hedge fund investors. To gauge hedge fund sentiment we used Insider Monkey’s proprietary database of 943 hedge funds and their holdings as of the end of the last quarter of 2022.
Most Undervalued Defense Stocks To Buy According To Hedge Funds
10. Moog Inc. (NYSE:MOG-A)
Number of Hedge Fund Holders: 19
New York-based Moog Inc. (NYSE:MOG-A) is one of the most notable defense companies in the world. Moog Inc. (NYSE:MOG-A) makes defense systems related to counter-unmanned aerial systems (C-UAS), fast ammunition handling, missile steering, turreted weapons, and quiet undersea actuation.
As of the end of the last quarter of 2022, 19 hedge funds reported owning stakes in Moog Inc. (NYSE:MOG-A). The total value of these stakes was about $124 million. The biggest stakeholder of Moog Inc. (NYSE:MOG-A) was Richard S. Pzena’s Pzena Investment Management, which had a $29 million stake in the firm.
In February, Moog Inc. (NYSE:MOG-A) increased its quarterly dividend by about 3.8%.
9. AAR Corp. (NYSE:AIR)
Number of Hedge Fund Holders: 20
In the defense sector, the Illinois-based aviation company AAR Corp. (NYSE:AIR) works with the US government, providing aircraft maintenance programs, Contractor Logistics Support (CLS), Performance-Based Logistics (PBL), and Third-Party Logistics (3PL). In addition to Lockheed Martin Corp (NYSE:LMT), Northrop Grumman Corp (NYSE:NOC) and Howmet Aerospace Inc (NYSE:HWM), AAR Corp. (NYSE:AIR) is one of the notable defense stocks to watch in the current market environment.
It is one of the most undervalued defense stocks to buy according to hedge funds. A total of 20 hedge funds tracked by Insider Monkey reported owning stakes in AAR Corp. (NYSE:AIR) at the end of the fourth quarter of 2022.
Carillon Tower Advisers made the following comment about AAR Corp. (NYSE:AIR) in its Q3 2022 investor letter:
“AAR Corp. (NYSE:AIR) supplies aftermarket products and services to the global aviation and aerospace industries. Sales to commercial customers continued to improve in the prior quarter but failed to meet expectations, while sales to government customers declined as key programs neared completion.”
8. Curtiss-Wright Corporation (NYSE:CW)
Number of Hedge Fund Holders: 22
Curtiss-Wright Corporation (NYSE:CW) is an aviation company that makes civil and defense applications and products. Curtiss-Wright Corporation (NYSE:CW)’s defense offerings relate to air, land, sea, space, cyberspace, and industrial applications. Curtiss-Wright Corporation (NYSE:CW) ranks 8th in our list of the most undervalued defense stocks to buy according to hedge funds.
During the fourth quarter of 2022, Curtiss-Wright Corporation (NYSE:CW)’s adjusted EPS came in at $2.92, beating estimates by $0.01. Revenue in the period increased by about 15.7% on a YoY basis to reach $758 million, beating estimates by $5.77 million. For 2023, Curtiss-Wright Corporation (NYSE:CW) sees its sales coming in the range of $2.66 billion to $2.71 billion, versus the consensus estimate of $2.70 billion. Adjusted EPS in the full year is expected to come in the range of $8.65 to $8.90.
As of the end of the fourth quarter of 2022, 22 hedge funds out of the 943 funds tracked by Insider Monkey reported owning stakes in Curtiss-Wright Corporation (NYSE:CW). The biggest hedge fund stakeholder of Curtiss-Wright Corporation (NYSE:CW) according to Insider Monkey’s database is Robert Joseph Caruso’s Select Equity Group which owns a $99.2 million stake in the company.
7. BWX Technologies, Inc. (NYSE:BWXT)
Number of Hedge Fund Holders: 33
BWX Technologies, Inc. (NYSE:BWXT) provides nuclear components to the US government. BWX Technologies, Inc. (NYSE:BWXT) is operating several business units. One of its units makes naval nuclear reactors for the Naval Nuclear Propulsion Program. This defense stock is in the spotlight these days as the company recently upped its dividend by 4.5%.
BWX Technologies, Inc. (NYSE:BWXT)’s adjusted EPS in the fourth quarter came in at $0.93, meeting estimates. For fiscal 2023, BWX Technologies, Inc. (NYSE:BWXT)’s revenue is expected to be $2.4 billion. EPS in the period is expected in the range of $2.80-$3.00 versus the consensus of $2.87.
As of the end of the fourth quarter of 2022, 33 hedge funds had stakes in BWX Technologies, Inc. (NYSE:BWXT), up from 28 hedge funds in the previous quarter. Hedge funds also like Lockheed Martin Corp (NYSE:LMT), Northrop Grumman Corp (NYSE: NOC) and Howmet Aerospace Inc (NYSE: HWM).
Here is what Upslope Capital specifically said about BWX Technologies, Inc. (NYSE:BWXT) in its Q3 2022 investor letter:
“BWX Technologies, Inc. (NYSE:BWXT) is a leading producer of nuclear reactors, components, and fuel, primarily for the power and propulsion of U.S. Navy subs and carriers. I sold our position and replaced it with CACI (detailed below). While I remain intrigued by the BWX story – unique product set, optionality outside of defense, and prospect of accelerating free cash flows – I became concerned with elevated management turnover (Chairman, CFO, CAO, and two division heads in the last year). Given the above-normal trust required in management for the thesis (believing capex will normalize and boost free cash flow soon and murky, long-tailed investments outside of defense), I decided to move on.”
6. Huntington Ingalls Industries, Inc. (NYSE:HII)
Number of Hedge Fund Holders: 34
Naval ships manufacturer Huntington Ingalls Industries, Inc. (NYSE:HII) ranks 6th in our list of the most undervalued defense stocks to buy according to hedge funds. As of February 28, Huntington Ingalls Industries, Inc. (NYSE:HII) has a PE ratio of 15.11. It has gained about 6% over the past 12 months. Hedge fund sentiment for Huntington Ingalls Industries, Inc. (NYSE:HII) is also strong. Insider Monkey’s database shows that 34 hedge funds had stakes in Huntington Ingalls Industries, Inc. (NYSE:HII) at the end of the fourth quarter of 2022, up from 24 hedge funds in the previous quarter. Dmitry Balyasny’s Balyasny Asset Management, Cliff Asness’ AQR Capital Management and Rajiv Jain’s GQG Partners are among the top hedge fund stakeholders of Huntington Ingalls Industries, Inc. (NYSE:HII) as of the end of 2022.
Huntington Ingalls Industries, Inc. (NYSE:HII) is also a dividend payer. Recently, it declared a quarterly dividend of $1.24 per share, the same as in the previous dividend. Forward yield came in at 2.29%. The dividend was payable on March 10 to shareholders of record as of February 24.
In February, Huntington Ingalls Industries, Inc. (NYSE:HII) posted its Q4 results. While GAAP EPS of $3.07 missed estimates by $0.23, the revenue of Huntington Ingalls Industries, Inc. (NYSE:HII) showed a 4.5% YoY growth.
For 2023, Huntington Ingalls Industries, Inc. (NYSE:HII) expects its shipbuilding revenue between $8.4 billion and $8.6 billion.
5. Textron Inc. (NYSE:TXT)
Number of Hedge Fund Holders: 36
Textron Inc. (NYSE:TXT) is an aircraft company whose products are used in the defense sector.
In January, Textron Inc. (NYSE:TXT) posted its fourth-quarter results, according to which its adjusted EPS in the period came in at $0.94, missing estimates by $0.13. Revenue in the quarter increased by about 9.3% on a YoY basis to reach $3.63 billion, beating estimates by $30 million. For 2023, Textron Inc. (NYSE:TXT) expects its revenue to total about $14.0 billion, versus the consensus estimate of $13.81 billion.
GAAP EPS for the full-year 2023 is expected to come in the range of $4.40 to $4.60, or $5.00 to $5.20 on an adjusted basis, versus the consensus of $4.50.
Insider Monkey’s proprietary database of 943 hedge funds and their holdings shows that 36 hedge funds had stakes in Textron Inc. (NYSE:TXT) at the conclusion of the fourth quarter of 2022. Among the biggest hedge fund stakeholders of Textron Inc. (NYSE:TXT) are Cliff Asness’ AQR Capital Management ($133.1 million stake) and Mario Gabelli’s GAMCO Investors ($120.3 million stake)
4. General Dynamics Corporation (NYSE:GD)
Number of Hedge Fund Holders: 46
Virginia-based General Dynamics Corporation (NYSE:GD) is among the world’s largest defense contractors in terms of arms sales. General Dynamics Corporation (NYSE:GD)’s GAAP EPS came in at $3.58 during the fourth quarter, missing estimates by $0.04. Revenue in the quarter increased by about 5.9% on a YoY basis to reach $10.9 billion, beating estimates by $240 million. Net cash provided by operating activities in the period came in at $669 million.
General Dynamics Corporation (NYSE:GD) recently won a contract worth about $481.58 million for the sustainment of Prophet Enhanced detecting systems.
At the end of the last quarter of 2022, 46 hedge funds out of the 943 funds tracked by Insider Monkey had stakes in General Dynamics Corporation (NYSE:GD). The total value of these stakes was about $8.2 billion. The biggest stakeholder of General Dynamics Corporation (NYSE:GD) in this period was James A. Star’s Longview Asset Management. The fund owns a whopping 28.3 million shares of the defense company.
3. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 49
Northrop Grumman Corporation (NYSE:NOC) ranks 3rd in our list of the most undervalued defense stocks to buy according to hedge funds. In February, Northrop Grumman Corporation (NYSE:NOC) said it entered into an accelerated share repurchase agreement with Bank of America to buy back $500 million of its common stock.
Northrop Grumman Corporation (NYSE:NOC) recently declared a quarterly dividend of $1.73 per share. The dividend was payable on March 15.
At the end of the fourth quarter of 2022, 49 hedge funds tracked by Insider Monkey reported owning shares of Northrop Grumman Corporation (NYSE:NOC). The total worth of these stakes was $1.5 billion. The biggest stakeholder of Northrop Grumman Corporation (NYSE:NOC) among these hedge funds was Rajiv Jain’s GQG Partners which had a $438 million stake in the company.
LRT Capital made the following comment about Northrop Grumman Corporation (NYSE:NOC) in its October investor letter:
“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation the US defense market is now controlled by five large companies: The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).
Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This industry structure has allowed Northrop to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximate 15x, next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ division submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-35 and F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; and so on…” (Click here to read the full text)
2. Raytheon Technologies Corporation (NYSE:RTX)
Number of Hedge Fund Holders: 51
Aerospace and defense company Raytheon Technologies Corporation (NYSE:RTX) ranks 2nd in our list of the most undervalued defense stocks to buy according to hedge funds. In February, Bofa included Raytheon Technologies Corporation (NYSE:RTX) in its top picks for 2023 in the industrials sector. BofA has a $120 price target on Raytheon Technologies Corporation (NYSE:RTX) which presents a decent upside potential from the current levels.
At the end of the fourth quarter of 2022, 51 hedge funds out of the 943 funds tracked by Insider Monkey had stakes in Raytheon Technologies Corporation (NYSE:RTX). The net worth of these stakes was about $1.8 billion. The biggest hedge fund stakeholder of Raytheon Technologies Corporation (NYSE:RTX) during this period was Dmitry Balyasny’s Balyasny Asset Management which had a stake worth about $230 million.
Carillon Tower made the following comment about Raytheon Technologies Corporation (NYSE:RTX) in its Q3 2022 investor letter:
“Raytheon Technologies Corporation (NYSE:RTX) announced strong results led by strength in its commercial segment, but weakness in its defense business led to investor consternation. Management guided to a recovery in this segment, citing both transitory supply chain issues and continued strong demand.”
1. Lockheed Martin Corporation (NYSE:LMT)
Number of Hedge Fund Holders: 53
Lockheed Martin Corporation (NYSE:LMT) is one of the most notable defense companies in the world. Lockheed Martin Corporation (NYSE:LMT) remains one of the top choices of US Army and Navy for their warfare needs. Lockheed Martin Corporation (NYSE:LMT) is consistently winning new contracts from the US military.
During the fourth quarter of 2022, Lockheed Martin Corporation (NYSE:LMT)’s adjusted EPS came in at $7.79, beating estimates by $0.42. Revenue in the quarter increased by 7.1% on a YoY basis to reach $18.99 billion, beating estimates by $740 million. For fiscal 2023, Lockheed Martin Corporation (NYSE:LMT)’s net sales are expected to total in the range of about $65 billion to $66 billion, versus the consensus of $65.75 billion.
In January, Lockheed Martin Corporation (NYSE:LMT) declared a quarterly dividend of $3.00 per share, in-line with the previous dividend. Forward dividend yield at the time came in at 2.61%.
As of the end of the last quarter of 2022, 53 hedge funds tracked by Insider Monkey reported owning stakes in Lockheed Martin Corporation (NYSE:LMT). The biggest hedge fund stakeholder of Lockheed Martin Corporation (NYSE:LMT) was Rajiv Jain’s GQG Partners which owns a $560 million stake in the company.
Here is what Vltava Fund has to say about Lockheed Martin Corporation (NYSE:LMT) in its Q3 2022 investor letter:
“LMT is one of the world’s largest aerospace and defence companies. The war in Ukraine has reminded investors and the wider public just how important these companies are. The aerospace and defence industry in the USA is an established oligopoly. This means that a few large firms play a dominant role. While collectively they comprise an oligopoly, individually they often have monopoly positions in particular narrower segments. Their main counterparty is the US government, a key customer in what is known as a monopsonist position. This is a rather unusual situation, but one that is very advantageous for companies such as LMT.
LMT has a strong and long-term sustainable competitive advantage ensuing from the fact that its products are developed and manufactured at an extremely high level of technology and complexity, its development and contract cycles are measured in decades, and the costs for the government to switch to alternative suppliers are high. Moreover, part of the production is classified as secret, which further takes the wind out of the sails of potential competitors. This results in a very high return on capital and admittedly a slowly but steadily growing business.
In most NATO countries, which are LMT’s customers, defence outlays are based upon the size of GDP. This is currently growing very fast in nominal terms due to inflation in most countries. A number of countries have also announced significant increases in defence budgets, whether it be Germany, which aims to get to the NATO-agreed 2% of GDP, or Poland, which wants to spend more than twice as much on defence…” (Click here to see the full text)
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Disclosure: None. 10 Most Undervalued Defense Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.
