The unrest in the Middle East has global stock markets dropping—the Dow Jones Industrial Average is down 168 points, or 0.6%, in midday trading Friday—but geopolitical unrest, perversely, can be good for the defense industry.
Defense stocks are rising in the aftermath of the U.S. airstrike that killed Qassem Soleimani, a top Iranian general—and an Iraqi paramilitary commander—in Iraq. Gains can be sustained because military tensions can make cutting defense spending untenable, especially in a U.S. presidential election year.
Stock in defense giant Lockheed Martin, for instance, surged more than $17 a share, or 4.3%, on Friday.
“If Middle East conflict were to ratchet up....we think it could be tougher for Democratic Party electoral candidates to argue against a stronger defense budget in 2020,” wrote Citigroup analyst Jonathan Raviv in a Friday research report. That removes a sentiment overhang, according to the analyst. “As is always the unfortunate case, defense stocks tend to benefit from perceptions of heightened risk and the potential for geopolitical conflict.”
President Donald Trump ordered the strike in retaliation for the attack on the American embassy in Baghdad this week.
....Iran will be held fully responsible for lives lost, or damage incurred, at any of our facilities. They will pay a very BIG PRICE! This is not a Warning, it is a Threat. Happy New Year!— Donald J. Trump (@realDonaldTrump) December 31, 2019
After the strike, the U.S. Defense Department released a statement saying, in part: “General Soleimani was actively developing plans to attack American diplomats and service members in Iraq and throughout the region....This strike was aimed at deterring future Iranian attack plans.”
It isn’t only stock in Lockheed Martin (ticker: LMT) that is rising. Bomber maker Northrop Grumman (NOC) stock is up 5.4%. General Dynamics (GD) shares have risen 0.8%. Stock in a smaller defense player, Kratos Defense & Security Solutions (KTOS), is up almost 10%.
Defense stocks have been strong recently. The S&P Aerospace & Defense Select ETF (XAR) has returned almost 29% over the past year, edging out the 25% comparable gain of the S&P 500.
Of course, one conflict shouldn’t cause wholesale changes to an investor’s portfolio. It could, however, make defense stocks more attractive at the margin. Baird analyst Peter Arment, for instance, became more positive on Buy-rated L3Harris Technologies (LHX) and Mercury Systems (MRCY) following Baird’s November investment conference.
Those are two other names, in addition to large defense contractors, that investors can research if they want more exposure to the sector.