The United States has dominated the global military scene since time immemorial. The country spends trillions of dollars on its defense to keep it upgraded. Meanwhile, defense stocks have had a great run since Donald Trump became President, courtesy of his humongous defense spending plan.
Further, Trump’s efforts to boost U.S. military strength have also paved the way for the sector’s gains. Rising geopolitical conflicts on a global scale and the magnitude of existing issues are expected to bolster growth of U.S. defense companies in 2020 as well.
Meanwhile, per the latest reports, global military spending saw the biggest increase in 2019. The latest annual assessment of the International Institute for Strategic Studies (IISS) titled, The Military Balance 2020 shed light on the fact that global defense spending rose 4% in 2019 from 2018 amid "an unstable international security environment."
The Unites States was the highest spender on defense in 2019 with $638 billion, followed by China, which spent $185 billion. The increase in U.S. defense budget of $53.4 billion from 2018 was almost equal to Britain's entire defense budget. In these circumstances, adding defense stocks to one’s portfolio seems prudent.
Geopolitics to Shape Up U.S. Defense in 2020
Investors remain bullish on U.S. defense stocks for 2020. They expect the space to dominate this year given geopolitical tensions. The animosity between the United States and its arch rivals, viz., Russia, China and North Korea has made defense stocks a hot choice.
The escalation of tensions between the United States and Iran also boosted defense stocks. The situation between the two countries worsened after U.S. forces killed Qasem Soleimani, an Iranian major general on Jan 3.
Things appear to have cooled down as of now. However, analysts have not negated the possibility of a potential war between the two countries. Furthermore, geopolitics of the Middle East has remained volatile in the recent past. Such fears are expected to propel gains for the space.
Defense Spending to Rake in Gains for the Space
Per the U.S. Department of Defense’s (DoD) fiscal 2021 budget proposal sent to Congress on Feb 10, the Trump administration’s fiscal 2021 defense budget request stands at $740.5 billion. This comes after three straight years of increases and is also in line with the two-year budget deal between the Congress and the White House last year. The Pentagon would be allotted $705.4 billion of the total budget.
The 2020 defense budget stands at $738.0 billion. This marks an increase of around $20 billion from the last year. The money is expected to be used for the establishment of the U.S. Space Force as well as for military hardware such as 98 F-35 and eight F-15EX aircraft.
Furthermore, the Pentagon wants to retire warplanes, drones and ships, some of which are less than two decades old. The idea is to free up billions of dollars, which could be used to develop as well as buy new weapons that defense officials believe are necessary to win a war against rivals like China and Russia.
Also, in September 2018, the Pentagon had announced that it would approximately spend $2 billion over the next five years on development of artificial intelligence.
3 Best Choices
President Trump’s huge defense spending bill, ever-growing geopolitical tensions and America’s defense resolve should lead to gains for defense stocks in 2020.
In this context, we have selected three defense stocks that are expected to gain. These three stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Heico Corporation HEI is a designer and manufacturer of aerospace, defense, and electronic related products and services.
The company is based out of Hollywood, FL and has a Zacks Rank #2. The expected earnings growth rate for the current year is 17.74%. The Zacks Consensus Estimate for the current year has improved 2.3% over the past 60 days.
Leidos Holdings, Inc. LDOS is a provider of services and solutions in the defense, intelligence, civil and health markets in the United States as well as globally.
The company is based out of Reston, VA and has a Zacks Rank #2. The expected earnings growth rate for the current year is 6.83%. The Zacks Consensus Estimate for the current year has improved 1.3% over the past 60 days.
L3Harris Technologies, Inc. LHX is a provider of advanced defense and commercial technologies across air, land, sea, space and cyber domains.
The company is based out of Melbourne, FL and has a Zacks Rank #2. The expected earnings growth rate for the current year is 39.60%. The Zacks Consensus Estimate for the current year has improved 1.9% over the past 60 days.
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