Once again, Washington D.C. is gridlocked.
It appears highly imminent that the U.S. government will enter a fiscal shutdown. With wide-ranging implications for large portions of the economy, military and related defense stocks may be hard hit.
Congress is scrambling to reach a deal which would prevent a government shutdown. But with major structural differences on various taxation policy and differing spending priorities, the parties may not be able to agree before the deadline.
When the government shuts down, it stops paying most of its bills until Congress reaches an agreement and reopens the government. This freezes spending highly impacts military employee and contractor salaries.
In the bigger picture, some Department of Defense spending may end up on the chopping block as part of a broader bipartisan deal to avert or end a shutdown and reopen the government. All this uncertainty has caused defense stocks to slip in recent weeks. Invariably, however, a new deal will eventually be reached, and the government will carry on.
These three defense stocks stand to benefit.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is one of the world’s largest aviation and defense companies. It produces its well-known fighter jets along with a variety of other military gear, along with a burgeoning satellite and space business.
LMT is appealing to investors an all-in-one defense stock pick. Regardless of weaponry or defense systems gaining in popularity, Lockheed Martin’s product lineup is broad enough to include them all. Its space division offers an intriguing and potentially high-growth option on top of terrestrial operations.
LMT stock has fallen nearly 20% from its highs over the past few months, even as the company reported upbeat earnings. This positions a powerful relief rally for Lockheed’s shares once the budget mess clears.
RTX (RTX)
RTX (NYSE:RTX), formerly known as Raytheon, has reinvented itself through a series of mergers and divestments. After combining with United Technologies Corp., the firm spun off its industrial businesses involving elevators and air conditioning in order to concentrate on defense and avionics. Today, RTX operates the Raytheon, Pratt & Whitney, and Collins Aerospace divisions.
RTX stock has come onto value investors’ radars over the past quarter. Shares were going for around $100 each this summer but have slumped to just $71 today.
The plunge came in large part due to a recall of hundreds of jet engines. The company expects this decision to hit profits by as much as $3.5 billion.
However, RTX’s market capitalization has now declined more than $20 billion since the above engine story rose to prominence. The market is seems to blow it way out of proportion. And with worries around the federal government’s budget impasse, RTX stock has become a strong buy-the-dip at just 14 times forward earnings.
AeroVironment (AVAV)
While most of the defense stocks have sold off in recent months, AeroVironment (NASDAQ:AVAV) has bucked the trend, thanks to incredible earnings results.
AeroVironment produces a variety of drone units that don’t require any human pilots. This allows militaries to engage with enemy combatants from long distance without risking their own personnel.
AeroVironment’s devices have proven invaluable during the war in Ukraine. Allies of Ukraine have been able to bolster the country’s defenses through the use of drones. That’s especially helpful as any direct involvement of U.S. or allied soldiers could further escalate the hostilities with Russia. Drones, on the other hand, don’t cross that line.
Unsurprisingly, various defense departments have been ordering additional AVAV drones in light of recent events. Thus, AeroVironment just announced stunning fiscal year 2024 Q1 results. Revenues soared 40% year over year (YOY), well ahead of expectations. Meanwhile, earnings per share of $1.00 absolutely crushed expectations of a mere 30 cent per share profit.
With AeroVironment’s business booming, AVAV stock should continue its rally.
On the date of publication, Ian Bezek held a long position in LMT and RTX stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.