In this article, we discuss the 10 undervalued defense and military stocks to buy now.
Geopolitical turmoil and all-out war tend to spell misery for financial markets around the world, but defense stocks see golden days when times are bad. Defense companies are on an upward surge ever since Russia-Ukraine tensions started hitting news headlines around the globe. Now that the Russian attack on Ukraine is more than two weeks in, countries around the world are ramping up military spending in order to counter the the threat of Russia, or any belligerent neighbor, invading their sovereign territory. Germany has decided to spend 2% of its GPD annually on military spending, and has set up a $112 billion fund to re-arm and modernize its army in 2022. The United States will up its defense budget to more than $770 billion for 2023, with the Pentagon increasing its initial budget request from $715 billion, a jump of 8%.
Countries around Ukraine are seeing heavy military build-ups as The North Atlantic Treaty Organization (NATO) postures to prevent further Russian aggression. Although no foreign military is engaging with the Russians in Ukraine, plenty of military help has been sent by the United States and its European allies to warring Ukraine. These include Javelin anti-tank missiles made by US defense giant Lockheed Martin Corporation (NYSE:LMT) and Stinger air-defense systems by Raytheon Technologies Corporation (NYSE:RTX).
Sentiments of war-profiteering aside, it is wise for investors to know which companies in the defense and military sector are trading below their intrinsic market value. Some of the top defense and military stocks to buy now include Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT) and Huntington Ingalls Industries, Inc. (NYSE:HII), along with others mentioned below.
Everett Historical / shutterstock.com
Our Methodology
To compile the following list, we picked defense and military companies with PE (price/earnings) ratio of less than 20. Hedge fund sentiment around each stock was derived from Insider Monkey’s database of 924 elite hedge funds.
10 Undervalued Defense and Military Stocks to Buy Now
10. VirTra, Inc. (NASDAQ:VTSI)
Number of Hedge Fund Holders: 4
PE Ratio (as of March 10): 14.22
VirTra, Inc. (NASDAQ:VTSI) starts off our list of undervalued defense and military stocks to buy. Based in Arizona, the company provides firearms training simulators, and driving simulators for military, law enforcement, educational, and commercial markets around the globe.
In December 2021, VirTra, Inc. (NASDAQ:VTSI) was given a standing offer from the Canadian government to supply marksmanship and judgmental use of force simulation technology to various law enforcement, border protection and corrections facilities throughout the country. This offer will allow the Government of Canada to repeatedly purchase goods/services at pre-arranged prices from VirTra, Inc. (NASDAQ:VTSI). In February, the firm received its first orders under this standing offer from a Canadian law enforcement agency.
VirTra, Inc. (NASDAQ:VTSI) also received two orders for its simulation technology from two foreign countries in January, worth $1.6 million and $1.1 million each. These purchases include simulators, software, content and associated training tools.
Jim Simons’ Renaissance Technologies upped its stake by 455% in VirTra, Inc. (NASDAQ:VTSI) during Q4 2021, holding roughly 111,000 shares worth $776,000, which made it the largest shareholder of the firm. In total, 4 hedge funds were bullish on VirTra, Inc. (NASDAQ:VTSI) stock in the fourth quarter, same as the quarter before.
In addition to Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT) and Huntington Ingalls Industries, Inc. (NYSE:HII), VirTra, Inc. (NASDAQ:VTSI) is a top undervalued defense and military stock to buy.
9. Ducommun Incorporated (NYSE:DCO)
Number of Hedge Fund Holders: 9
PE Ratio (as of March 10): 4.61
Ducommun Incorporated (NYSE:DCO) stock was held by 9 hedge funds in the fourth quarter of 2021, with combined holdings worth $612.6 million. Royce & Associates held a $20 million stake in the firm comprising of 428,000 shares, making it the top shareholder of Ducommun Incorporated (NYSE:DCO) in Q4 2021.
Based in California, Ducommun Incorporated (NYSE:DCO) provides engineering and manufacturing products to the aerospace and defense industries in the United States. These include aircraft avionics racks, shipboard communications, and aircraft parts such as flight control surfaces, engine components, ammunition handling systems, and magnetic seals. Last year, Ducommun Incorporated (NYSE:DCO) announced that it had been recognized as an Airbus Detail Parts Partner by Airbus, and awarded a long-term contract to work on key products for the A320 and A330 programs.
In December, Ducommun Incorporated (NYSE:DCO) acquired Rhode Island-based Magnetic Seal Corporation for an undisclosed fee. Magnetic Seal Corporation provides sealing solutions to every branch of the US military and is a part of over 50 commercial and military aircraft programs including the AH-64 Apache, F-15 and F-18 fighter jets, C-130 transports and A320 jets. This deal will help further advance Ducommun Incorporated’s (NYSE:DCO) industry offerings.
Ducommun Incorporated (NYSE:DCO) posted an EPS of $0.79 for the fourth quarter, which was in-line with estimates. Q4 revenue stood at $164.84 million, which was up 4.47% compared to the year-ago quarter, but missed estimates by $3.50 million.
8. Sturm, Ruger & Company, Inc. (NYSE:RGR)
Number of Hedge Fund Holders: 15
PE Ratio (as of March 10): 8.03
Sturm, Ruger & Company, Inc. (NYSE:RGR) is a firearms manufacturer based in the United States, and ranks next on our list of undervalued defense and military stocks to buy. It offers firearms under its Marlin name, which include sporting rifles, pistols, single-action and double-action revolvers; and firearms accessories and replacement parts. The firm sells its products to clients around the world, which mostly include law enforcement agencies and foreign governments.
As of the fourth quarter, 15 out of 924 elite hedge funds tracked by Insider Monkey were bullish on Sturm, Ruger & Company, Inc. (NYSE:RGR) shares, with aggregate stakes worth $99.8 million. In contrast, 16 hedge funds held positions worth $130.5 million in the firm a quarter ago. With 1.03 million shares valued at $70.1 million, Renaissance Technologies of billionaire Jim Simons was the largest shareholder in Sturm, Ruger & Company, Inc. (NYSE:RGR) in the fourth quarter.
On February 23, Sturm, Ruger & Company, Inc. (NYSE:RGR) declared a $0.86 per share quarterly dividend, which is an 8.9% increase from its prior dividend of $0.79. As of March 10, Sturm, Ruger & Company, Inc. (NYSE:RGR) offers a healthy dividend yield of 4.98%.
7. Smith & Wesson Brands, Inc. (NASDAQ:SWBI)
Number of Hedge Fund Holders: 17
PE Ratio (as of March 10): 3.23
Smith & Wesson Brands, Inc. (NASDAQ:SWBI) is another firearms manufacturer that features on our list of undervalued defense and military stocks to buy. The Massachusetts-based firm provides revolvers and pistols, long guns and firearms related accessories, and also provides manufacturing services such as heat treating, rapid prototyping, finishing, machining, and custom plastic injection molding to various industries.
In December, Lake Street analyst Mark Smith maintained a ‘Buy’ rating on Smith & Wesson Brands, Inc. (NASDAQ:SWBI) shares, and lowered the price target to $38 from $43, noting that although revenue decreased from last year, the firm saw an increase in adjusted EBITDA which demonstrate its flexible manufacturing capabilities, as demand normalized following “18 months of historic demand.” The analyst sees Smith & Wesson Brands, Inc. (NASDAQ:SWBI) as well-positioned to capitalize on over 12 million new gun owners added to government records since early 2020.
Out of 924 elite hedge funds that were tracked by Insider Monkey in the fourth quarter of 2021, 17 hedge funds held positions in Smith & Wesson Brands, Inc. (NASDAQ:SWBI), with a combined value of $83.2 million. In comparison, 19 hedge funds were long on the company shares in the third quarter, with aggregate holdings worth $138.5 million.
6. Huntington Ingalls Industries, Inc. (NYSE:HII)
Number of Hedge Fund Holders: 23
PE Ratio (as of March 10): 15.61
Huntington Ingalls Industries, Inc. (NYSE:HII) is based in Virginia, close to the national defense headquarters of the United States government, and deals in the design, construction and repair of military ships. It builds amphibious assault ships, expeditionary warfare ships and surface combatants for the US Navy and US Coast Guard. The firm also deals in the provision of nuclear-powered ships, such as aircraft carriers and submarines.
Hedge funds were seen loading up on Huntington Ingalls Industries, Inc. (NYSE:HII). In the fourth quarter of 2021, 23 hedge funds held stakes worth $199 million in the firm. This is up from 15 hedge funds in the previous quarter, with combined holdings worth $163.3 million.
On February 17, Huntington Ingalls Industries, Inc. (NYSE:HII) was awarded a cost-plus-fixed-fee modification to its contract with the US Navy, worth $188.91 million. Under this contract modification, the firm will continue its repair, maintenance, upgrades and modernization efforts on the USS Columbus.
In December, Huntington Ingalls Industries, Inc. (NYSE:HII) was initiated with an ‘Outperform’ rating and a $225 price target by Wolfe Research analyst Michael Maugeri, who views the stock’s underperformance in the last two years as a good buying opportunity.
In early March, Huntington Ingalls Industries, Inc. (NYSE:HII) successfully completed the first contractor-owned, contractor-operated air combat training mission with the United States Air Force in Europe. This mission enables the US Air Force in Europe and Africa to enhance training readiness, and is a milestone for contracted adversary air training outside the United States.
Along with Northrop Grumman Corporation (NYSE:NOC) and Lockheed Martin Corporation (NYSE:LMT), Huntington Ingalls Industries, Inc. (NYSE:HII) is a trending defense and military stock to buy.
5. CACI International Inc. (NYSE:CACI)
Number of Hedge Fund Holders: 26
PE Ratio (as of March 10): 16.42
CACI International Inc. (NYSE:CACI) ranks next on our list of undervalued defense and military stocks to buy. The Virginia-based firm offers services to the intelligence, defense, and federal civilian sector which include digital solutions, engineering services, enterprise IT, and mission support services. CACI International Inc. (NYSE:CACI) also provides cyber products and solutions to the American intelligence community and the United States Department of Defense.
Out of all the hedge funds tracked by Insider Monkey, 26 were long CACI International Inc. (NYSE:CACI) at the close of the fourth quarter, with combined holdings worth $428.8 million. This shows increasing investor confidence in the company from last quarter, where 20 hedge funds held stakes in CACI International Inc. (NYSE:CACI) with an aggregate value of approximately $395 million. Horizon Asset Management was the top shareholder of CACI International Inc. (NYSE:CACI) in the fourth quarter of 2021, with 463,000 shares valued at $124.73 million.
In late January, Raymond James analyst Brian Gesuale upgraded CACI International Inc. (NYSE:CACI) to ‘Outperform’ from ‘Market Perform’, setting a $300 price target. The analyst believes now is an appealing time to hold CACI stock, with geopolitical instability and improving business fundamentals acting as positive catalysts for the firm.
On January 25, CACI International Inc. (NYSE:CACI) acquired Virginia-based IT firm ID Technologies for $225 million, in a deal which will allow CACI to expand its secure network modernization capabilities. As of March 10, CACI International Inc. (NYSE:CACI) has gained 25.25% in the last year, and 14.99% in the last six months.
4. BWX Technologies Inc. (NYSE:BWXT)
Number of Hedge Fund Holders: 26
PE Ratio (as of March 10): 16.48
BWX Technologies Inc. (NYSE:BWXT) provides nuclear components and products which include precision naval components, nuclear reactors and nuclear fuel, as well as missile launch tubes for United States Navy submarines. Its clients include the United States Department of Energy and the National Nuclear Security Administration’s Naval Nuclear Propulsion Program. The Virginia-based firm also provides commercial nuclear steam generators, fuel handling systems and pressure vessels.
In November last year, Maxim analyst Tate Sullivan gave BWX Technologies Inc. (NYSE:BWXT) a ‘Buy’ rating, noting that the firm’s investor day presentation indicated higher growth potential for the firm beyond 2024, driven by growth in its business of developing nuclear reactors for nuclear-powered aircraft carriers and submarines, as well as its global opportunity in nuclear medicine. BWX Technologies Inc. (NYSE:BWXT) posted an EPS of $0.95 for the fourth quarter, beating estimates by $0.02.
Investors were eager on BWX Technologies Inc. (NYSE:BWXT) in the fourth quarter of 2021, where 26 hedge funds recorded bullish bets on the company shares. In comparison, 17 hedge funds were seen holding positions in BWX Technologies Inc. (NYSE:BWXT) in Q3 2021. Cardinal Capital was the top shareholder in BWX Technologies Inc. (NYSE:BWXT) by the end of December, with 1.65 million shares worth $79.14 million.
Investment firm Upslope Capital Management discussed BWX Technologies Inc. (NYSE:BWXT) in its Q3 2021 investor letter, stating:
“BWX Technologies designs and produces nuclear reactors, components and fuel, primarily for the U.S. Government and Navy (and, more recently, NASA). The company is the sole supplier for its Naval products (~75% of sales), which are used for the power and propulsion of all of the Navy’s aircraft carriers and submarines. With nuclear subs (aka “boomers”) forming the backbone of the “Sea” leg of the Nuclear Triad, BWX plays a vital and sensitive role supporting the national security of the United States. Of course, BWX is exceptionally well-positioned should the saber-rattling vis-à-vis China continue. The recent Aukus security pact, which may eventually benefit BWX, illustrates the urgent and strategic importance of maintaining a modern nuclear-powered sub fleet.
Even if relations with China stabilize (and hopefully they do), BWX shares seem poised to outperform. After four years of essentially going nowhere, the stock currently trades near the low-end of its historical valuation range – just over 13x EBITDA vs. typical range of 13-16x. With a literal monopoly position (albeit against a sole purchaser), BWX has historically generated modest top-line growth with attractive returns on capital (mid-20s). Given the stability of the business and its competitive position, as well as the current geopolitical backdrop, current valuation seems very reasonable.
Importantly, beginning in 2017 BWX embarked on an aggressive capex expansion program, eventually tripling capex as a percentage of sales. In addition to ramping capacity to support Navy growth, BWX spent heavily developing its medical/radioisotope business. While not yet concluded, there is light at the end of the tunnel that should bode well for shares. 2020 appears to have been the capex peak and BWX seems on track for more normalized capex by the end of 2022. This should lead to de-levering the balance sheet (from an already-reasonable 3x gross debt/EBITDA), a potential acceleration in capital returned to shareholders, and/or the prospect of increased M&A.
Lastly, while BWX’s core today is its Naval operations, there is long-term optionality from the other units (~25% of revenue), which are currently focused on Canadian nuclear power (fuel and components), medical, space (NASA) power, and microreactors. BWX faces little competition, if any, across many of these areas. A sizable portion (>50%) of the recent capex program was also invested in a new Mo-99/Tc99 radioisotope (essentially a cleaner, more cost efficient alternative to current products on market – used in cardiology, oncology, neurology, and diagnostics) production line that should lead to an acceleration in growth outside of Naval operations.
Major risk factors for BWX include the possibility of physical accidents, production defects and resulting liabilities, as well as cost pressures due to strained government budgets and/or rising input costs, some leverage (~2x net), and ESG flow headwinds (not fundamental, of course, but a reality).”
3. Leidos Holdings Inc (NYSE:LDOS)
Number of Hedge Fund Holders: 28
PE Ratio (as of March 10): 19.55
Then there’s Leidos Holdings Inc (NYSE:LDOS), an IT firm providing national security solutions and cyberspace systems to a list of clients including the US intelligence community, the Department of Defense, and NASA.
In February, Leidos Holdings Inc (NYSE:LDOS) was awarded the Defense Enclave Services contract by the Defense Information Systems Agency, worth an estimated $11.5 billion. Under this agreement, the firm will unify the DAFAs (Defense Agencies and Field Activities) on a common network architecture, to provide mission services focused on improved security, enhanced user experience, and network reliability.
On March 9, Leidos Holdings Inc (NYSE:LDOS) was awarded a seven-year, $545 million contract to support the National Institute of Allergy and Infectious Diseases (NIAID), by providing a range of biomedical, preclinical and development capabilities and capacity to the organization. In February, Goldman Sachs analyst Gavin Parsons gave Leidos Holdings Inc (NYSE:LDOS) a ‘Buy’ rating and a price target of $103.
Investors were seen piling into Leidos Holdings Inc (NYSE:LDOS) in Q4 2021, with 28 hedge funds bullish on the company shares, as compared to 14 hedge funds a quarter ago. Israel Englander’s Millennium Management was the top shareholder in Leidos Holdings Inc (NYSE:LDOS) by the end of the fourth quarter, with a stake comprising of roughly 362,000 shares worth $32.16 million.
2. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 33
PE Ratio (as of March 10): 10.21
Northrop Grumman Corporation (NYSE:NOC) is a defense giant working on multiple military and aerospace projects with the Pentagon. It is a subcontractor on the F-35 fighter jet, and also manufactures radars, cybersecurity systems, and drones for the American military. The firm is also working on the B-21 stealth bomber, of which the US Air Force plans to buy 80 to 100 units to replace the Boeing B-52. Northrop Grumman Corporation (NYSE:NOC) reported earnings per share of $6.00 for the fourth quarter, beating analysts’ estimates by $0.04.
33 hedge funds held stakes in Northrop Grumman Corporation (NYSE:NOC) at the close of the fourth quarter, with a combined value of $561 million. This shows a positive trend from last quarter where 29 hedge funds held positions worth $910 million in the firm. Yacktman Asset Management was the leading shareholder of Northrop Grumman Corporation (NYSE:NOC) in Q4 2021, holding roughly 442,000 shares worth $171.2 million.
On March 7, analyst Matthew Akers at Wells Fargo kept an ‘Equal Weight’ rating on Northrop Grumman Corporation (NYSE:NOC) shares whilst raising the price target to $472 from $390. Akers believes that the stock’s valuation would likely remain on the higher side for some time to come owning to elevated geopolitical tensions. As of March 10, Northrop Grumman Corporation (NYSE:NOC) has seen its share price gain 48.18% in the last 12 months, and 25.44% in the last 6 months.
1. Lockheed Martin Corporation (NYSE:LMT)
Number of Hedge Fund Holders: 42
PE Ratio (as of March 10): 19.52
Lockheed Martin Corporation (NYSE:LMT) ranks first on our list of undervalued defense stocks to buy. 42 hedge funds reported owning shares in the firm as of Q4 2021, with holdings worth $976.1 million. D E Shaw held the biggest stake in Lockheed Martin Corporation (NYSE:LMT) at the close of the fourth quarter, worth $171.4 million and comprising of 482,000 shares. This represented a 59% increase in holding from the previous quarter.
With a market cap of $122.2 billion, Lockheed Martin Corporation (NYSE:LMT) is one of the biggest defense firms in the world, having served the US government for decades. It produces fighter jets, unmanned drones, military and commercial helicopters, air and missile defense systems, and other services related to national security systems. The firm reported earnings per share of $7.24 for the fourth quarter, beating estimates by $0.10. Revenue for the Q4 stood at $17.73 billion, beating analysts’ forecasts by $71.71 million and signaling a 4.09% increase from the year-ago period.
On February 28, Wolfe Research analyst Michael Maugeri upgraded Lockheed Martin Corporation (NYSE:LMT) to ‘Outperform’ from ‘Peer Perform’ and set a $467 price target, noting that stocks in the defense sector would face significant upside in the coming months as the Russian invasion of Ukraine increases military spending around the world. He likes Lockheed’s outsized exposure in the global market, and strong demand for its aeronautics products.
Here is what RiverPark Advisors, LLC had to say about Lockheed Martin Corporation (NYSE:LMT) in its Q4 2020 investor letter:
“Despite better-than-expected third quarter results, LMT shares were weak for the quarter as defense spending is expected to be flat for the coming year. With a record $150 billion backlog and almost 30% of its revenue coming from building F-35 aircraft with deliveries forecast to reach 180 per year in 4-5 years (3Q’s revenue upside was from the F-35), we believe LMT should grow at a higher rate than overall defense budget growth and Street expectations over the next several years. Further, strategic acquisitions (LMT acquired AJRD for $4 billion in late December), debt pay down, a 3% dividend yield, and continued share buybacks from $6 billion per year of free cash flow should lead to even greater shareholder returns.”
You can also take a look at 10 Best Communication Equipment Stocks To Buy and 10 Best Solar Energy Stocks To Buy Now.
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Disclosure. None. 10 Undervalued Defense and Military Stocks to Buy Now is originally published on Insider Monkey.
