Are arms stocks worth buying? An investment guide to defense stocks amid global geopolitical crises

Why Is Now a Good Opportunity for Defense Stocks?

Over the past year, regional conflicts have been frequent—Ukraine-Russia conflict, escalating Middle East tensions, and governments worldwide adjusting their defense budgets accordingly. China, Taiwan, and the United States are all increasing military spending. This is not a coincidence but stems from a fundamental shift in understanding: Modern warfare has entered an era dominated by technology.

Drones, precision missiles, and information warfare have replaced traditional manpower tactics. Countries aim to achieve defense objectives with fewer personnel and higher efficiency, directly driving demand growth in the defense industry.

Warren Buffett once said that good investments require three elements: enough wet snow, a long runway, and a deep moat. Defense stocks happen to meet all three criteria.

What Are the Unique Advantages of Defense Stocks?

Extremely Long Industry Cycle

Throughout history, international conflicts have never ceased. This means the demand for military procurement is sustainable and will not disappear during economic downturns. Compared to the cyclical fluctuations of civilian tech industries, the demand logic for defense stocks is more stable.

Deep Technological Moat

Defense companies possess some of humanity’s most advanced technologies—many civilian technologies are actually derived from military tech. Military aircraft, missile systems, radar technology—all involve national security and have high entry barriers. Once a company gains government trust, it’s hard to be replaced.

Additionally, defense contracts often involve patents and exclusive supply agreements, giving leading companies a long-term and solid competitive advantage.

Geopolitical Factors Drive Growth

The world is entering an era of regional politics. The US manufacturing resurgence, US-China trade war escalation, Russia-Ukraine conflict, Taiwan’s geopolitical risks—these factors all lead countries to increase military spending. In the short term, this trend is unlikely to reverse.

Core Considerations When Investing in Defense Stocks

Before buying any defense stock, investors must understand two key indicators:

1. Defense Revenue Share

Not all companies claiming to be “defense stocks” are worth buying. Some have less than 30% of their revenue from military business, mainly focusing on civilian products. If this part is small, profit growth driven by increased military spending will be limited.

For example, Caterpillar (CAT) is classified as a defense stock, but less than 30% of its revenue comes from military sales; its main business remains industrial equipment. FedEx (FDX) has handled military logistics but is fundamentally a civilian logistics company. The stock performance of such companies mainly depends on global infrastructure investment and economic cycles.

In contrast, Northrop Grumman (NOC) is a pure defense company, the world’s largest radar manufacturer, with over 95% of revenue from military business. This is a true defense stock investment target.

2. Risks in Civilian Business

Many large defense companies also operate in civilian markets. Boeing and Raytheon are examples. The trap here is: even if military orders are stable, downturns or issues in the civilian sector can drag down the overall stock price.

Boeing experienced this in 2023. While military aircraft orders remained stable, issues like the 737 MAX crashes, COVID-19 pandemic, and competition from China’s commercial aircraft (C919) hurt the civilian segment, causing a sharp stock decline.

Similarly, Raytheon faces similar risks. Its defense orders are solid, but problems with parts supplied to Airbus A320neo—such as quality issues—mean that in the next 3-4 years, hundreds of aircraft will need re-inspection, with repair times up to 300 days. This results in revenue impacts, large legal risks, and customer loss, directly eroding profitability.

3. Future Demand Forecast

Before investing, consider whether the company’s products align with future military needs.

For example, traditional land-based weapons orders have limited growth potential because land forces of most countries will not expand significantly. However, modernization of air forces and navies—such as drones, satellite communications, and precision missiles—are the key investment directions for the future.

Analysis of Leading US Defense Stocks

Lockheed Martin (LMT): A Steady Growth Leader

Lockheed Martin is one of the world’s largest defense companies, with a very high proportion of military revenue. The company focuses on missiles, missile systems, space technology, and other cutting-edge fields.

Historical charts show a long-term steady upward trend, with short-term corrections mainly due to broader market adjustments. As a defensive long-term investment, Lockheed Martin’s stability is noteworthy.

Northrop Grumman (NOC): The Purest Defense Choice

Northrop Grumman is the fourth-largest global arms supplier and the world’s largest radar manufacturer. Its business is highly concentrated in defense, making it the most “pure” defense stock.

The company has stable profits and has increased dividends for 18 consecutive years. Recently, it accelerated a $500 million share buyback program to maintain shareholder value. In space, missile, and communication tech, Northrop Grumman is a global leader, aligning with countries’ strategic deterrence needs.

As long as major global powers maintain vigilance in defense investment, Northrop Grumman can enjoy steady business growth. Its deep technological moat and pure defense focus make it a top long-term investment choice.

General Dynamics (GD): A Defensive Stock with Stable Cash Flow

General Dynamics is one of the five major US defense contractors, serving land, sea, and air forces. Besides military products, it also manufactures Gulfstream private jets for top global clients.

The defense revenue breakdown (civilian 25%, navy 23%, national security info 22%, weapons 18%, mission services 12%) shows a key advantage: its civilian business is resilient during economic downturns. Even during the 2008 financial crisis or the COVID-19 pandemic, profits remained relatively stable.

This stability has resulted in 32 consecutive years of dividend increases, a rare achievement among US listed companies. Although revenue growth is modest, cost control and profit margin optimization allow the company to buy back shares annually. For investors seeking stable cash flow, General Dynamics is a reliable choice.

Raytheon (RTX): Caution Needed

Raytheon is one of the five major US defense contractors, with defense segments covering missile systems, aerospace defense, etc. While military orders are stable, 2023’s poor stock performance is mainly due to civilian sector issues.

The company’s powder metal parts supplied to Airbus A320neo may fracture under high pressure, requiring re-inspection of about 350 aircraft annually over the next 3-4 years, with repair times up to 300 days. This causes revenue impacts, legal risks, and customer attrition.

Until civilian issues are fully resolved, overall profitability remains unpredictable. Investors should not focus solely on the defense segment’s stability but also assess external risks. Caution is advised before buying; it’s better to wait until the situation clarifies.

Boeing (BA): Bottom-Fishing, Not Chasing Highs

Boeing is one of the two major US commercial aircraft manufacturers (the other is Airbus) and also a top five defense supplier, with military aircraft including B-52 bombers and Apache helicopters.

The stock plummeted mainly due to issues in the civilian market. The 2018-2019 crashes of the 737 MAX led to worldwide grounding, followed by the pandemic, causing demand for civilian aircraft to collapse. Profits sharply declined and have not fully recovered.

A bigger threat is new competition. Boeing once dominated the market relying on European and American government subsidies to push competitors out. But with trade tensions escalating, China’s government is supporting domestic aircraft manufacturing (C919), which could capture market share globally in the future.

From an investment perspective, military orders are expected to remain stable, but civilian prospects are uncertain. Boeing stock is suitable for bottom-fishing during sharp declines, not for chasing highs.

Investment Opportunities in Taiwan Defense Stocks

The Taiwan Strait is a focal point of global geopolitical attention. Over the past two years, Taiwan and China have significantly adjusted their defense budgets, creating growth opportunities for domestic defense companies.

Thunder Tiger Technology (8033.TW): From Toys to Drones

Thunder Tiger was originally a remote-controlled model aircraft manufacturer, mainly producing toys. But with the rise of the global drone market, the company shifted into military drones, quickly becoming a defense concept stock. In 2022, its stock surged significantly, reflecting market optimism about its defense prospects.

As demand for military drones continues to grow, Thunder Tiger is worth close attention.

Hanxiang (2634.TW): Diversified Military and Civil Business

Hanxiang’s business structure is similar to Boeing’s but with lower risk. Its civilian segment mainly handles aircraft maintenance and parts sales, while its military segment focuses on trainer aircraft.

Its key advantage is diversification. Even if a certain aircraft model or product faces issues, the company still has maintenance and repair markets as revenue sources. As industry demand increases, maintenance services will grow accordingly, making Hanxiang’s stock more stable than Boeing or Raytheon.

Compared to other defense stocks facing single-brand or single-model risks, Hanxiang’s stability is worth investors’ attention.

How to Assess Whether Defense Stocks Are Worth Buying?

Before investing in defense stocks, consider the following factors:

Financial Health

Check debt ratios, cash flow, profit margins. Stable cash flow is often more important than rapid growth because defense contracts are usually long-term and paid in installments.

Defense Revenue Share

A company must have over 50% of revenue from military business to be considered a pure defense stock. If civilian business is too high, cyclical risks increase.

Technological Moat

Does the company possess hard-to-duplicate technology? Has it gained long-term trust from the government? These determine future order stability.

Civilian Business Outlook

If involved in civilian markets, evaluate whether that segment faces new competition, product risks, or market saturation.

Geopolitical Sensitivity

Is the company’s home country under military threat? Is the target market’s defense budget continuously increasing?

Summary

Defense stocks are fundamentally long-term defensive investments. Market demand is stable, and the risk of company failure is low (governments won’t let major defense suppliers go bankrupt), with deep moats. But this applies mainly to “pure” defense companies.

When investing, it’s crucial to distinguish: defense revenue share, civilian business risks, and technological leadership. Lessons from Raytheon and Boeing show that growth in military orders does not necessarily lead to stock price increases; decline in civilian business and quality issues can wipe out all defense profits.

Choosing pure defense firms like Northrop Grumman and Lockheed Martin, or diversified companies like Hanxiang with strong risk resistance, is a smarter investment decision. The long-term rise in geopolitical tensions ensures growth space for these companies—provided you select the right targets.