Arms Dealer Rise: Investment Opportunities in Defense Stocks Amid Global Geopolitical Crises

Why Focus on Defense Stocks Now?

Regional conflicts are frequent, from the Russia-Ukraine war to Middle Eastern tensions, countries are reevaluating their defense strategies. Rather than traditional military confrontation, it’s more a competition of technology, information, and precision strike capabilities. Drones, missile guidance systems, cyber defense networks, and other technological warfare tools are rewriting the rules of modern warfare.

This transformation presents both challenges and opportunities for the defense industry. Governments worldwide are increasing military spending, aiming to replace manpower-intensive tactics with more efficient technological solutions. In an era of declining birthrates, solutions that leverage funding to enhance national defense are attractive to any government. Major countries like China, Taiwan, and the US are continuously increasing their defense budgets, providing sustained order growth for defense-related companies.

Core Characteristics of Defense Stocks

The definition of defense stocks is broader than you might think. Traditionally, it includes everything from large weapon systems to daily military supplies—any company with business dealings with the Ministry of Defense or clients related to national defense can be classified as a defense concept stock.

The industry’s greatest advantages are threefold:

Extremely long industry cycle — Human conflicts have never ceased, and military demand will never disappear. Unlike consumer markets that can be easily disrupted, defense needs are fundamentally persistent.

Deep moat — Defense technology often leads civilian markets by years or even decades. Due to national security concerns, entry barriers are high, and trust-building takes a long time. The close relationship between governments and defense companies makes it nearly impossible for new competitors to penetrate the market.

Certain growth drivers — Rising geopolitical tensions and increased military spending have become the new normal. Unless a rare global disarmament wave occurs, this industry’s growth prospects remain relatively certain.

Key Considerations for Investing in Defense Stocks

Before selecting targets, investors must understand an often-overlooked trap: the importance of the defense proportion.

When a company’s military revenue accounts for less than 50%, its stock price and profitability are more influenced by the civilian market. This means that even if defense orders steadily increase, a decline in civilian business can easily drag down overall performance.

Additionally, pay attention to future demand trends. As technological warfare becomes more prominent, orders related to traditional land forces may slow, while investments in air force, navy, and space defense will become focal points. Companies with leading technology but products misaligned with future needs may face limited growth potential.

Comparison of Major US Defense Industry Leaders

Lockheed Martin (LMT)— Pure Defense Industry Leader

Lockheed Martin has long been the world’s largest defense contractor. The company focuses on missile, rocket, and space systems, with a clear defense industry profile. Since going public, its stock has shown steady growth, with most corrections caused by broader market adjustments rather than deteriorating fundamentals.

As a long-term investment, its pure defense background and technological leadership provide strong resilience against risks.

Northrop Grumman (NOC)— Hidden Champion

The fourth-largest global defense manufacturer and the largest radar producer, Northrop Grumman’s business covers missile systems, space systems, and communication technology. Its main R&D focus is on “strategic deterrence,” aiming to make potential adversaries hesitant to even consider conflict.

This strategic focus aligns well with current global security trends. As international conflicts persist, countries will continue to increase related investments to maintain deterrence. The company has increased dividends for 18 consecutive years, with a deep technological moat, making it suitable for long-term holdings. Recently, it announced a $500 million share buyback plan, reflecting management’s confidence in the company’s prospects.

General Dynamics (GD)— Stable Cash Cow

One of the US’s top five defense suppliers, General Dynamics has a diversified business model, covering land, sea, air weapon manufacturing, and civil aircraft production.

Its civilian segment (about 25%) focuses on Gulfstream business jets, with a solid customer base and strong resilience to economic cycles. This structure ensures overall stability—profits remained stable during the 2008 financial crisis and the COVID-19 pandemic. As a result, the company has achieved 32 consecutive years of dividend growth, a rare feat among US listed companies.

While revenue growth is slower than pure defense firms, its stable cash flow and ongoing share repurchases make it an excellent defensive defense stock.

Raytheon Technologies (RTX)— Needs Observation

Raytheon spans both military and civilian sectors, with defense orders remaining stable. However, recent setbacks include the 737 MAX issues caused by component quality problems, leading Airbus to re-inspect hundreds of aircraft. Repair cycles could reach up to 300 days, severely damaging Raytheon’s civilian reputation and exposing it to airline litigation risks.

Until the civil sector issues are resolved, profit outlooks are uncertain, and stock performance remains under pressure. Despite defense sector strength, external risks offset these gains. Now is not the best time to enter.

Boeing (BA)— Bottom-Fishing or Trap?

Boeing is one of the two major players in commercial aerospace and also a top five defense supplier. But its stock price decline is primarily due to challenges in the civilian market, not defense.

The 737 MAX accidents, pandemic impacts, and the rise of domestic Chinese aircraft have clouded Boeing’s commercial outlook. While defense orders (like B-52 bombers and Apache helicopters) remain steady, they cannot offset the decline in civil aviation.

From an investment perspective, Boeing is suitable for bottom-fishing rather than chasing rallies, and investors should closely monitor the recovery of the civil aviation market.

Caterpillar (CAT)— Marginal Defense Stock

Caterpillar is often labeled a defense stock, but defense revenue accounts for less than 30%. Its main business remains heavy machinery. Its connection to defense mainly comes from post-war reconstruction needs—after wars, urban rebuilding often requires大量工程设备.

Performance of such companies mainly depends on global infrastructure investment cycles and raw material prices, not on defense budgets. Therefore, it should not be viewed as a pure defense investment target.

Opportunities in Taiwan Defense Stocks

Rising geopolitical sensitivity in the Taiwan Strait has led both sides to increase military spending. The local defense industry is迎來 a rare development opportunity.

Thunder Tiger Technology (8033.TW) is worth watching for its transformation. The company shifted from remote-controlled model manufacturing to UAV development, with a business model integrating military and civilian applications, opening new imagination space. As UAVs become increasingly important in modern warfare, related orders are expected to grow.

Hanwha (2634.TW) adopts a differentiated approach. Besides its main military business of trainer aircraft, it also engages heavily in maintenance, repair, and parts sales. This business model offers stronger cyclicality resistance—demand for maintenance and repair persists as long as the aviation industry remains active. Compared to foreign peers suffering from single-brand or single-model issues, Hanwha’s diversified business is more stable.

Investment Decision Framework

When evaluating defense stocks, consider three dimensions:

Fundamentals: Defense revenue proportion, technological leadership, core customer stability, financial health

Industry: Demand outlook in the specific segment, technology update cycle, policy support

Risks: Potential drag from civilian business, geopolitical unpredictability, litigation and compliance risks

Pure defense companies (defense revenue over 70%) tend to be more certain, but those with higher civilian exposure may have better growth prospects but also more uncertainty. Choose based on your risk appetite.

Summary

Defense stocks currently have a clear investment logic—industry longevity, deep moats, and certain growth drivers. But the key to success is not just judging the industry outlook, but understanding the specific corporate structure.

Even if a company has booming defense orders, if its civilian business is in crisis, or its technology direction is misaligned with future warfare, or management makes mistakes leading to lawsuits, its stock can still crash. Therefore, selecting stocks with pure defense backgrounds, deep moats, and manageable civilian risks is crucial for industry profits.

The rise and fall of defense contractors ultimately depend on their own operational capabilities, not just external factors.