Key Points
- After an active and mostly bullish summer, stocks have been selling off in August.
- Despite the noise about a government shutdown, it shouldn't have much effect on defense spending, which is bullish for defense stocks.
- This article looks at three defense stocks investors can put on their watchlist before market volume rises in September.
- 5 stocks we like better than Lockheed Martin
Sell in May and go away was slightly delayed this year. In 2023, August is the month when investors are finally taking a breather. Historically, the dog days of summer bring more volatility and lower trading volume. That's particularly true in the latter part of August.
The problem for investors is that history isn't a friend of investors in September either. That may not get you excited about jumping into stocks, but it should be time to add stocks to your watch list. And the defense sector deserves close attention.
Even if the Federal government shuts down in September, defense spending is likely to continue uninterrupted. That was the case the last time a shutdown was threatened in September 2021. And with $842 billion for defense spending already on the books for 2024, it's a good time to shop for value.
The recent pullback in the market has the added benefit of making many of these stocks available at better valuations. Here are three defense stocks for investors to consider before market volume picks up in September.
A Great Value Despite the High Price
Lockheed Martin Corporation NYSE: LMT is a blue-chip defense stock that offers investors good value despite a lofty price tag. Lockheed Martin is a defense contractor focusing on virtually every aspect of the defense industry, whether by land, sea, air or space. The company accounts for 28% of all U.S. defense contract spending.
One of the company's key focuses in 2023 is developing 21st century security products and services. This includes areas such as artificial intelligence, cybersecurity and manufacturing.
Despite all of that, LMT stock remains relatively undervalued. It trades at a forward price-to-earnings (P/E) ratio of around 16x. And earnings are expected to grow at around 4% a year. This should support a price tag of around $499, which is 10% higher than the stock price as of August 21.
LMT stock is also an underrated dividend stock with a dividend yield of 2.66% as of August 21. However, it's also important to mention the $12 per share annual payout and that Lockheed Martin has increased its dividend for 20 consecutive years.
Profit as Investors Sell the News on This Defense Stock
RTX Corporation NYSE: RTX is down 11% in the last 30 days as of this writing. Many analysts are attributing the drop to a product recall. The company is a combination of Collins Aerospace, Pratt & Whitney, and Raytheon.
RTX stock is down 11% since July 25, 2023. At that time, hundreds of Airbus jets were recalled due to an issue found in their engines which were made by Pratt & Whitney. A pull-back may have been in order since RTX stock still trades for 22x after the sell-off. And as many companies are discovering, once you give investors a reason to sell beyond the fundamentals, they'll start looking at the fundamentals.
However, this creates an opportunity to buy RTX stock at a much more appealing 17x forward earnings. The concern is that some airline manufacturers may move away from the Pratt & Whitney engine. But chief executive officer (CEO) Greg Hayes said that would be a "draconian step" while expressing confidence that the company will work through the current crisis.
A Record Backlog Should Pull This Stock Higher
Of the three stocks on this list, General Dynamics Corporation NYSE: GD stock is bucking the market trend. GD stock is up over 4% in the last month. But you don't have to dig that far into the company's earnings report to see why this stock has more upside.
Yes, the company beat on the top and bottom lines. Some investors could quibble that the company's earnings were lower year-over-year (YoY). However, earnings are forecast to rise over 17% next year.
And the reason why was found early in the company's second-quarter earnings presentation. Specifically, General Dynamics reported a $91.4 billion backlog of orders. That should be enough to convince investors they can believe in that earnings growth.
Plus, GD stock trades at 17x earnings and offers a growing dividend with a 2.26% dividend yield.
Before you consider Lockheed Martin, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Lockheed Martin wasn't on the list.
While Lockheed Martin currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.
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