Consider These Defense Stocks Amid Russia-Ukraine Tensions

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Feb. 14 2022, Published 10:31 a.m. ET

Tensions between Russia and Ukraine have increased over the last few days. The U.S. has asked its citizens and troops to leave Ukraine in what's seen as an imminent war between Russia and Ukraine. Defense stocks could see buying interest if Russia and Ukraine head to war. What are the best defense stocks to buy in 2022?

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Even without the Russia-Ukraine tensions, defense stocks could see traction because geopolitical tensions have been running high. Along with Russia, China is also a growing threat to its neighbors, many of whom share a disputed border with the country.

Defense stocks have a positive outlook.

China’s rise is making several countries, including the U.S., apprehensive, which is leading to higher defense spending. Countries in the Middle East have also doubled down on their defense budgets amid the threat from Iran. Europe is facing more geopolitical threats after years of underinvesting in its security. This would mean higher global defense spending, which is positive for defense stocks.

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What are the best defense stocks to buy in 2022?

The following look like the best defense stocks to buy in 2022:

  • Lockheed Martin
  • Northrop Grumman
  • Raytheon

While U.S. stock markets have come off their highs, these stocks have looked strong and trade near their 52-week high prices.

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Lockheed Martin is the largest pure-play defense company.

Many companies that are in the defense business also produce products for civil use. However, if you're looking at a pure-play defense company, Lockheed Martin looks like a good bet.

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The company’s F-35 Joint Strike Fighter has a total value of $400 billion and is the Pentagon's biggest acquisition program. The F-35 has been the mainstay for Lockheed Martin and accounts for a quarter of its sales.

Lockheed Martin stock trades at an NTM PE multiple of 14.9x, which looks reasonable. Its dividend yield of 2.8 percent also looks attractive and is over twice the S&P 500’s dividend yield.

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Northrop Grumman is a diversified play in the defense industry.

A country’s defense isn't just about just protecting its land and water borders. Cybersecurity is a national security threat just like air, land, and water intrusions. Northrop Grumman is a diversified play in the defense industry. The company offers air, land, sea, space, and cybersecurity solutions. Northrop Grumman produces the Global Hawk drone and is a subcontractor for Lockheed Martin’s F-35 program.

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Northrop Grumman has a dividend yield of 1.6 percent. While the dividend yield is lower than what Lockheed Martin offers, it's higher than the S&P 500’s meager yield. The stock trades at an NTM PE multiple of 16.1x, which is higher than its 3-year average multiple.

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Raytheon is a defense and civil player.

Raytheon Technologies was born in 2020 when Raytheon merged with United Technologies. Businesses that weren't into defense and aviation were spun off.

Raytheon serves defense and commercial aircraft industries and owns Collins Aerospace and Pratt & Whitney. The stock was under pressure in 2020 as global airline traffic plummeted. However, things are looking bright in 2022 and both its civil and defense business should do well.

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Raytheon produces missile defense systems.

Raytheon also produces missile defense systems. The segment should do well amid growing missile threats, especially from North Korea. Several countries are looking to augment their missile defense capacities. India and Turkey have ordered the multi-billion-dollar S-400 missile defense system from Russia.

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Raytheon Technologies stock trades at an NTM PE multiple of around 20x and has a dividend yield of 2.1 percent. The stock was in the news recently amid a corporate shakeup. The company's missile division CFO and several other executives were ousted. However, the company’s long-term growth trajectory looks strong and it's one of the best hybrid companies with exposure to civil and defense.

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