Best Defense Stocks for 2017: Is This Right Time to Invest Under Trump?

Best Defense StocksDefense Stocks Trump Effect

The top defense stocks for 2017 are still ripe as we reach the end of Q1. This is mostly because of President Donald Trump’s defense budget, which promises the Pentagon an extra $54.0 billion in military spending.

Talk about Christmas-come-early. Even though the year is still young, President Trump is shaping up as an extraordinary ally of the defense industry. I call this the “Defense Stocks Trump Effect.”

As the 45th president of the United States, Trump holds enormous power. He is the Commander-in-Chief, capable of launching missile strikes and drone attacks. His policies shape the nation’s priorities; which areas of the government get money, and which areas do not.

That’s why investors were so bullish on the defense industry after the election. As soon as 270 electoral college votes landed in Trump’s column on November 8, 2016, it was a done deal. Every savvy investor knew they could count on a new chunk of military spending.

Advertisement

How many times had Trump promised to “rebuild the military?” Too many to count. That’s why elevation to the White House came as welcome news to the defense industry. But investors still faced a serious problem; they didn’t know which stocks to pick.

The broad trend was clear (as you can see from the defense stocks index chart below), but no one can price the budget’s effects on individual stocks. Or rather, they cannot price it with a high degree of accuracy.

Defence stocks chart

Chart courtesy of StockCharts.com

Put another way, investors don’t know which stocks to bet on. They don’t know which ones will win the new defense spending, because Trump’s defense budget is too light on details.

But here are some important highlights that caught my eye:

  • The budget allocates $603.0 billion in spending
  • That is a 10% year-over-year increase
  • It breaks spending caps from The Budget Control Act of 2011
  • Trump wants to expand the Navy from 274 ships to 350 ships
  • Part of the $54.0-billion increase goes to the Energy Department (for uranium protection)
  • The increase is paid for by cuts at the State Department and Environmental Protection Agency (EPA)

Based on these scant details, I would stick to the established players in national defense. Why, you ask? Because sometimes it takes money to make money. Cliché or not, that is often a true reflection of the world. The established titans of national security have deep pockets, meaning they can hire the best lobbying teams and offer the best patronage.

In such cases, I’m more bullish on heavyweights like Boeing Co (NYSE:BA) and Northrop Grumman Corporation (NYSE:NOC) than on no-name startups from the middle of nowhere.

Top Defense Stocks for 2017

We’ll know more about President Trump’s defense budget in a few months. Like his predecessors, he’ll unveil the final budget after concluding backroom negotiations.

Believe it or not, some senators are accusing Trump of being too dovish on military spending! Senator John McCain, for instance, is furious at the proposals. He thinks the budget is woefully inadequate for facing what he calls a “world on fire.” (Source: “McCain: Trump defense budget not enough for ‘world on fire’,” The Hill, February 27, 2017.)

This suggests that if the budget is tweaked between now and its final release, the changes will expand the amount of defense spending, not limit it. And Hillary Clinton was supposed to be the war hawk…ironic, isn’t it?

In any case, the “Defense Stocks Trump Effect” is real. Shareholders in the top defense stocks for 2017 can attest to that. They have already made significant returns from this phenomenon.

Don’t take my word for it. Just look below:

Best Defense Stocks For 2017

Symbol Company TTM* Return Dividend
GD General Dynamics Corporation 41.82% 1.76%
BA Boeing Co 41.44% 3.18%
NOC Northrop Grumman Corporation 29.18% 1.48%
RTN Raytheon Company 26.75% 1.90%
LMT Lockheed Martin Corporation 24.04% 2.71%

*Trailing Twelve Months

These are massive players in the defense industry, each with more than three quarters of their shares owned by institutional investors. What does that tell you? It tells you that Wall Street—with all their inside sources and advanced research—are getting rich off these defense stocks.

Why shouldn’t you do the same thing?

More on These 5 Defense Companies to Watch in 2017

It’s not often that stocks offer big capital gains alongside a juicy dividend. Most stocks force the investor to choose, but defense stocks are in a unique position. They are a bulwark against the chaos of the outside world, meaning their fortunes rise as global conflicts worsen.

These five defense companies are perfect examples. They’ve all stacked up double-digit gains in the last year, while simultaneously offering their shareholders consistent dividends.

If I were to estimate which stocks are the best defense stocks for 2017, I would have to list the following five companies. All of them are diversified enough to catch some portion of Trump’s splurge on military equipment. Here’s a brief summary of each firm.

1. General Dynamics Corporation

General Dynamics Corporation (NYSE:GD) has four business segments spread across the aerospace and defense category: “Combat Systems,” “Information Systems and Technology,” “Aerospace,” and “Marine Systems.” If the naval buildup in Trump’s defense budget is true, then we could see GD stock accelerate through 2017. Its stock already outperformed the Dow Jones Industrial Average (DJIA)  by a wide margin.

GD stock chart

Chart courtesy of StockCharts.com

2. Boeing Co

The name Boeing Co (NYSE:BA) is most closely associated with commercial airlines, but that’s not all the company does. It is a military contractor as well. Having the defense business offset downturns in the airline industry (which is happening right now), making this a more balanced bet for the risk-averse investor. But don’t forget that BA stock racked up more than 40% gains in the last 12 months. This company has an ability to soar when it wants to.

BA stock chart

Chart courtesy of StockCharts.com

3. Northrop Grumman Corporation

Northrop Grumman Corporation (NYSE:NOC) is another possible beneficiary from President Trump’s military buildup. It is a major contractor on the “F-35” stealth fighter jet. Although Trump wants to rein in costs on that program, he also wants to add 100 new fighter jets to the air force’s armada. It’s reasonable to assume that some of this money would find its way into Northrop’s pockets or, to be more accurate, NOC stock shareholders’ pockets.

NOC stock chart

Chart courtesy of StockCharts.com

4. Raytheon Company

Like others on this list, Raytheon Company (NYSE:RTN) is a multi-faceted defense contractor. It deals in everything from missiles to technical services (consulting, training, logistics). There has been a recent surge in domestic missile demand, hence the spike in RTN stock. An arms buildup would suggest that this trend is likely to continue.

RTN stock chart

Chart courtesy of StockCharts.com

5. Lockheed Martin Corporation

As the primary contractor on the F-35 stealth fighter project, Lockheed Martin Corporation (NYSE:LMT) was obviously more vulnerable to political risk than other defense stocks. A huge portion of its future revenues became a political football during the election, but there has been a softening of tone. Trump seems like he will impose cost controls with one hand and grant new contracts with the other, ensuring that LMT stock will continue to rise.

LMT stock chart

Chart courtesy of StockCharts.com

The Warning Signs

Some analysts speculated that Trump’s military buildup would focus on modern threats, such as cybersecurity. Not so much, as it turns out. While some cybersecurity vendors are sure to make money off the increased spending, most of the conversation is about conventional weapons.

President Trump spends a lot of time talking about ships, tanks, and fighter jets. He spends comparatively less time (at least in the context of defense spending) talking about cyber threats.

That is one major takeaway from Trump’s defense budget. Another one is that diplomacy will take a backseat to military might over the next four years.

Remember that the 10% increase in defense spending is paid for by a 30% reduction in State Department resources. More military. Less diplomacy. National security experts, including Trump’s Secretary of Defense, General James Mattis, say that this could lead to more war.

Mattis, who is now heading the Pentagon, once told Congress that, “If you don’t fully fund the State Department, then I need to buy more ammunition.” (Source: “USGLC President: Mattis – A Smart Choice Who Understands Civilian Tools Complement Military,” U.S. Global Leadership Coalition, December 1, 2016.)

Mattis isn’t alone. His views are largely supported by the incoming National Security Advisor, General H.R. McMaster, who says that leaving out the political side of war is a major fallacy.

But it’s not just military leaders that think war is around the corner. Steve Bannon (Trump’s chief strategist and National Security Council member) is on record predicting a war with China. “We’re going to war in the South China Sea in five to 10 years,” said Bannon in March 2016. (Source: “Breitbart News Daily – Lee Edwards,” Breitbart, March 10, 2016.)

“There’s no doubt about that. They’re taking their sandbars and making basically stationary aircraft carriers and putting missiles on those. They come here to the United States in front of our face — and you understand how important face is — and say it’s an ancient territorial sea.”

Bannon is a central figure in the Trump administration. He is both a confidante and adviser to the president, meaning that his beliefs are more than just beliefs. They have the power to shape policy outcomes. So let’s do the math.

The surge in defense spending is great news for the five stocks listed above. But it was funded by cuts to the State Department, which could lead to more global conflict. Moreover, Bannon believes that war with China is imminent.

What does that mean for defense stocks? To put it simply: it means that top defense stocks could skyrocket in 2017.