Five Defense Stocks to Buy Right Now

Research done by several analysts over the years shows that defense stocks represent the safest bet for investors when markets are moving downwards. That’s because the news, events  or sentiments that drive most stocks lower generally doesn’t have much effect on defense stocks, rather they fare much better than the broader market during times of uncertainty and turmoil. Even during times of peace, the sector displays consistent growth because military technology is constantly evolving and governments need to keep up pace with it by updating the arms and ammunitions used by their security forces. Most governments allocate a signification portion of their budget every year towards military spending. The U.S. for instance allocated over 15% or roughly $640 billion of its budget towards defense spending last year and a large chunk of it was spent on buying new equipments and services from defense companies.

So far, 2016 has acted as a perfect example of why one should buy defense stocks during times of uncertainty. While the broader market is experiencing negative momentum this year, most defense stocks are trading flat or in the green year-to-date. Considering the likelihood of the broader market failing to generate positive returns in the coming months, we thought it might be the right time to come up with a list of defense stocks that investors should buy right now. To compile the list, we scanned the portfolios of the over 800 hedge funds and investors we track and identified the defense stocks that were most popular among them going into 2016. In this post, we are going to reveal and analyze the five defense stocks that topped our list.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

#5 Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS)

– Investors with Long Positions (as of December 31): 6

– Aggregate Value of Investors’ Holdings (as of December 31): $30.38 million

The number of investors tracked by us with long positions in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) inched down by one and the aggregate value of their holdings declined by 13.7% during the fourth quarter. Chuck Royce‘s Royce & Associates was the largest shareholder of the company in our database; it owns 3.6 million shares of Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), as of December 31. Though shares of the company have been on a gradual decline in the past two years, they are trading up by 11.47% year-to-date. On March 10, Kratos Defense & Security Solutions surprised the Street by declaring EPS of $0.02 on revenue of $177.50 million for the fourth quarter, when analysts were expecting a per share loss of $0.11 on revenue of $163.75 million. Since the company is into development of drones, analysts feel that it has potential to do well in the coming years, but at the same time they are also concerned about its declining revenues, negative cash flows and the high level of debt on its books.

#4 Orbital ATK Inc (NYSE:OA)

– Investors with Long Positions (as of December 31): 26

– Aggregate Value of Investors’ Holdings (as of December 31): $810.88 million

Orbital ATK Inc (NYSE:OA) is the only stock in this list that is trading with high single-digit losses this year. It seems that hedge funds had anticipated this move and that’s why, despite Orbital ATK Inc (NYSE:OA)’s stock rising by almost 25% during the fourth quarter, its ownership among funds covered by us declined by seven and the aggregate value of their holdings saw only a modest rise of 7.15%. Orbital ATK Inc (NYSE:OA) was born in February 2015 after the completion of the merger of Orbital Sciences Corporation and Alliance Techsystems. A large part of the drop that the stock has witnessed this year came after it reported its fourth-quarter results on February 29, but despite this decline it is still trading up by 30% from the day it started trading as a merged entity last year. On March 23, the company launched its fifth resupply mission to the International Space Station, carrying 7,900 pounds of cargo.

#3 Raytheon Company (NYSE:RTN)

– Investors with Long Positions (as of December 31): 35

– Aggregate Value of Investors’ Holdings (as of December 31): $1.07 billion

Amid a 14% rise in its stock during the fourth quarter, the ownership Raytheon Company (NYSE:RTN) among funds covered by us increased by four and the aggregate value of their holdings jumped $236 million. Billionaire David E. Shaw‘s firm D.E. Shaw more than doubled its stake in the company during that period to 447,717 shares. Though Raytheon Company (NYSE:RTN)’s stock is currently trading flat for 2016, it has appreciated by 150% in the last five years and generated even more returns for its shareholder if one includes the dividends it has paid during that period. The company has consecutively hiked its dividend in the past 11 years and currently sports an annual dividend yield of 2.15%. Taking into account Raytheon Company (NYSE:RTN)’s financial performance in the past few quarters, some analysts believe that the company can again hike its dividend by 10% this year. On March 16, the company announced that it will be designing new long-range missile systems for the US army to replace the current tactical missile system weapons.

#2 Lockheed Martin Corporation (NYSE:LMT)

– Investors with Long Positions (as of December 31): 37

– Aggregate Value of Investors’ Holdings (as of December 31): $826.81 million

In spite of its shares appreciating by 4.7% and its ownership among funds tracked by us inching down by two, the aggregate value of investors’ holdings in Lockheed Martin Corporation (NYSE:LMT) saw a 45.7% decline during the fourth quarter. One of the largest shareholders of the company, Cliff Asness‘ AQR Capital Management further reduced its holding by 17% to 545,416 during the fourth quarter after having already cut it by one-third during the third quarter. Owing to the rally Lockheed Martin Corporation (NYSE:LMT)’s stock has seen since mid-February, it is currently trading up by 1% for the year. Speaking at the company’s annual media day on March 15, Lockheed Martin Corporation’s CEO, Marillyn Hewson, said that the company has ‘no regrets’ about its acquisitions of Sirkosy for $9 billion last year despite the slowdown in commercial helicopter sales. On March 8, the company announced a voluntary layoff for its Aeronautics business, through which it intends to reduce its headcount by 1,000.

#1 Northrop Grumman Corporation (NYSE:NOC)

– Investors with Long Positions (as of December 31): 40

– Aggregate Value of Investors’ Holdings (as of December 31): $2.26 billion

Northrop Grumman Corporation (NYSE:NOC) has continued its upward journey, which it began in 2013, this year too. The stock of the company has almost tripled in the last three years and has been making new all-time highs almost every month. Hence, it’s not hard to understand why the company’s popularity among hedge funds is on the rise. During the October-December period, ownership of the company among the investors we track increased by three and the aggregate value of holdings rose by $285 million. Billionaire Stephen Mandel‘s Lone Pine Capital initiated a large stake in the company during that period by purchasing over 2.13 million shares. The company is expected to report its fiscal 2016 first quarter numbers at the end of next month and analysts are currently expecting EPS of $2.47 on revenue of $5.92 billion for the quarter. For the same quarter of the previous year, Northrop Grumman Corporation (NYSE:NOC) reported EPS of $2.41 on revenue of $6.00 billion. The stock currently sports an average rating of ‘Overweight’ and an average price target of $201.80 from the 20 prominent research houses and analysts who cover it.

Disclosure: None