How to choose military industry stocks? Investment logic in the context of the global landscape

Geopolitical conflicts intensify, military spending repeatedly hits new highs. How should we seize the military-industrial sector’s benefits? Instead of blindly following the trend, it’s better to understand the fundamental logic of military stocks.

Why Focus on Military Stocks Now

Modern military conflicts are no longer fought with mass human waves. Technologies such as information warfare, drones, and precision missiles have become key to victory, directly driving up countries’ military expenditures. China, the US, Taiwan, and even countries worldwide have significantly increased their defense budgets over the past two years, and this trend is unlikely to reverse in the short term.

In an era of declining birthrates, replacing manpower with technology has become a common choice for many nations. Defense capabilities that once required large armies can now be achieved through advanced weapons, making the order outlook for military companies promising.

Core Criteria for Selecting Military Stocks

Investing in military stocks shouldn’t be based solely on concepts; several key indicators must be examined:

Military Revenue Share is the first screening criterion. If a company’s military business accounts for less than 30%, and its main products are civilian, then the policy-driven benefits of the military-industrial sector will have limited impact on its stock price. Raytheon and Boeing are typical examples—while their military orders are steadily growing, issues in their civilian divisions have caused their stock prices to plummet.

Alignment with Future Needs is also crucial. As the number of military personnel stops increasing and the proportion of technology continues to rise, orders related to the Army may slow down, but demand in the Air Force, Navy, and information warfare sectors will keep expanding. Choosing the right direction allows investors to capture larger growth dividends.

Investment Map of US Military Stocks

Lockheed Martin (LMT): Pure Military-Industrial Leader

Lockheed Martin is the world’s largest defense contractor, producing aircraft, missiles, satellite systems, and other cutting-edge weapons. Over 90% of its revenue comes from military sales, making it a quintessential military stock.

From a technical perspective, the company holds numerous defense-grade patents, creating extremely high entry barriers and a deep moat. Long-term, its stock price steadily trends upward, with dips mainly due to market corrections, which do not affect its fundamentals. For investors seeking long-term exposure to the military sector, this is the top choice.

Northrop Grumman (NOC): Radar and Space Expert

The fourth-largest defense manufacturer globally and the largest radar producer, Northrop Grumman is active in strategic deterrence, focusing on space, missiles, and communications technology. The company maintains steady profits, with 18 consecutive years of dividend growth, and actively conducts share buybacks to protect shareholder interests.

As long as global concerns about national defense persist, even without actual warfare, countries will increase military investments as a precaution. Under this logic, Northrop Grumman offers long-term investment certainty.

General Dynamics (GD): Guardian of Stable Cash Flow

General Dynamics is one of the five major US defense suppliers, serving the Navy, Army, and Air Force. Interestingly, its civilian division (Gulfstream jets) provides income streams relatively resistant to economic fluctuations, making the company’s overall revenue more stable.

Even during the 2008 financial crisis and the COVID-19 pandemic, its profits remained relatively stable, exemplifying its moat. With 32 consecutive years of dividend growth, only 30 US companies have achieved this honor. While growth potential is limited, its stability makes it an excellent dividend-paying investment.

Raytheon (RTX) and Boeing (BA): Waiting for Risk Release

Both companies face challenges in their civilian divisions. Raytheon has been embroiled in lawsuits over aircraft parts and will need to handle large-scale inspections and maintenance costs in the coming years. Boeing has been hit by the 737 MAX incidents and the pandemic, and faces competition from Chinese commercial aircraft.

Although military orders continue to grow, these two are not ideal entry points at the moment. Once risks are gradually released and the market re-prices, it could be a better time to buy the dip.

Caterpillar (CAT): The Boundary of Military-Industrial Concept

Strictly speaking, less than 30% of Caterpillar’s revenue comes from military-related sectors; mainly, it produces industrial equipment. If post-war reconstruction drives infrastructure demand, it could benefit. Therefore, this type of company is more of a military-industrial concept stock rather than a pure military stock, with performance mainly dependent on global government investment cycles.

Opportunities in Taiwan’s Military-Industrial Sector

The Taiwan Strait is a global geopolitical hotspot, with military budgets of both sides attracting market attention. Taiwan’s defense department has increased procurement efforts in recent years, creating opportunities for domestic military companies.

Thunder Tiger Technology (8033.TW) is a typical beneficiary. Transitioning from a remote-controlled model aircraft manufacturer to a drone leader, its stock price surged significantly in 2022. As demand for military drones increases, the company warrants ongoing attention.

Hanchong (2634.TW) has a more resilient business model. It develops military trainer aircraft and also engages in civilian aircraft maintenance. Compared to Raytheon and Boeing, which face difficulties due to single-brand issues, Hanchong’s diversified maintenance business provides stable cash flow. As long as civil aviation demand remains strong, the company will benefit.

Investment Logic Framework for Military Stocks

Warren Buffett once said, good investments require three elements: a long enough track, a deep moat, and a “wet” snowball. Military stocks happen to meet all three.

The track never goes out — Throughout human history, conflicts have never ceased. The demand for armies is endless, and the industry’s lifecycle far exceeds that of typical businesses.

Deep moat — Military technology often leads civilian tech by 20 years. The most advanced technology exists in labs and military units, and civilians can only access it after upgrades. Entry barriers are extremely high, and trust takes decades to build. Leading companies maintain close relationships with defense departments, making them hard to replace.

Growth drivers are certain — As the world enters an era of regional politics, the likelihood of geopolitical conflicts rising increases. Trump’s “Made in America” policy signals a reversal of economic globalization, with countries increasing military budgets as a defense measure. Large-scale disarmament in the short term is unlikely, making the growth potential of military stocks relatively certain.

Final Reminder on Stock Selection

While military stocks have long-term investment potential, not all stocks labeled “military” are worth buying. Investors must thoroughly assess a company’s military revenue share, health of civilian divisions, and whether its technological advantages are clear.

Examples like Raytheon and Boeing warn us that increasing military orders do not necessarily lead to stock price rises. Declines in civilian business, legal issues, and market competition can offset the benefits of military growth.

Conversely, pure military companies (like Lockheed Martin, Northrop Grumman) or those with stable business structures (like General Dynamics, Hanchong) are more worth considering. A comprehensive evaluation of financial health, industry trends, geopolitical factors, and civilian market changes is essential for making wise investment decisions.