Which defense stocks are optimal for short-term investments?

As the conflicts in the Middle East and Ukraine continue to escalate, investors may be considering investing in defense stocks.

Amid rising tensions, the performance of defense stocks has been mixed this year, with many well-known stocks underperforming the S&P 500. So, let's move on to today's question from SA Asks. Currently, which defense stocks are optimal for short-term investments?

Seeking Alpha analyst Dhierin Bechai, JR Research's Jere Wang, Leo Nelissen, and Deep Value Ideas were asked for their stock picks.

Mr. Dhierin Bechai: In the short term, I believe Saab AB (OTCPK: SAABF) is offering an attractive investment opportunity. Among the defense stocks I cover, Saab AB is one of the two stocks currently undervalued compared to peers and the median EV/EBITDA multiples. The other stock with potential upside is Hensoldt AG (OTCPK: HAGHY).

Mr. Jere Wang of JR Research: I consider Lockheed Martin (NYSE: LMT) to be the most suitable short-term investment in the defense sector. The company is heavily influenced by the increasing geopolitical tensions related to the Russia-Ukraine conflict and supply opportunities. It is also expected to be a major beneficiary of the anticipated increase in US defense spending.

Mr. Leo Neri: In the short term, the situation is challenging. The defense industry as a whole has just benefited from strong performance and stock price increases in the second quarter of 2024. Most major defense contractors are finally showing solid revenue and profit growth, often raising guidance. This suggests to investors that headwinds in the supply chain and margins have eased.

: However, I continue to prefer RTX (NYSE: RTX) and L3 Harris Technologies Inc (NYSE: LHX). In this market, both companies have the potential to achieve annual returns of 10-14%, and I believe they have above-average short-term potential. L3 Harris (LHX) has benefited from major M&A, including the acquisition of Aerojet. This has made the company a giant in the missile industry. On the other hand, RTX (RTX) is experiencing rapid growth at the fastest pace since the pandemic, benefiting from both commercial and defense tailwinds.

Furthermore, both companies are benefiting from strong demand from European NATO member countries, such as missile defense and improving F-35 production rates. Both manufacturers are key suppliers to this project, providing engines and the latest technological upgrades.

deep value ideaNo. The market has appropriately incorporated the current expectations for the companies I cover, and the short-term outlook is quite clear. Of course, there may be unexpected positive surprises, but at this point, I think investors should focus on the long term rather than the short term.

If choosing one stock, it would be Northrop Grumman (NYSE: NOC). This is due to the very favorable outcome of the cost reassessment for the ground-based strategic deterrence program recently announced by the Department of Defense. In such a situation, there is a possibility of a sharp rise in the stock price if further positive news emerges. However, please note the recent strong rebound of NOC (NOC) stock.