Geopolitical tensions with North Korea and President Donald Trump’s push to expand the U.S. armed forces have recently given defense stocks a boost. Meanwhile, Senator McCain — U.S. Armed Services Committee Chairman — commented that the condition of the army is deplorable. Now, when ‘national security’ is high on the President’s agenda, it is least likely that such comments would go unheard.

Against this backdrop, the rally in defense stocks may well last long. This is why it makes good sense to add stocks from this sector to your portfolio.

Defense Policy Bill Likely to be Signed into Law

On Jul 14, the U.S. House of Representatives passed the fiscal 2018 defense policy bill, which has an outlay of $696.5 billion that surpasses Trump’s earlier budget request. Democrats and some Republicans have opposed Trump’s plan to significantly increase defense spending on national security by introducing huge budget cuts for the Environmental Protection Agency, Medicaid and the Supplemental Nutrition Assistance Program or SNAP.

Despite such opposition, economists believe that the Defense Policy Bill will be likely signed into law. Moreover, matters concerning national security have always been high on lawmakers’ agenda, so much so that defense policy bills has been approved each year for more than half a century.

McCain Expresses Concerns Over Defense Readiness

On Sep 7, Senator John McCain had raised concerns about the “declining state” of the U.S. Armed Forces. He stated, “The state of our military is dire. The overwhelming majority of our forces are not fit for combat in the near term.”

According to McCain, of the 59 army brigades, only three are “combat-ready”. Also, only four of the 64 Air Force squadrons would be ready almost instantly if a situation arises. Not even half of the total Marine and Navy planes are war-ready. Moreover, the Air Force immediately needs 1,500 pilots and surprisingly 1, 000 of those happen to be fighter pilots.

Lingering Tussle With Kim Jong-un Regime

The now familiar and nagging geopolitical tension between North Korea and the United States is also one of the major reasons why shares of defense contractors have surged in the recent past. Moreover, Trump’s "fire and fury" comment did bring about broad-based losses for the markets but defense stocks rallied.

Recently, when Pyongyang tested its hydrogen bomb, it triggered a 6.3 magnitude earthquake. In response to the news of the hydrogen bomb test, U.S. Defense Secretary, James Mattis, gave a strict warning to North Korea. Mattis said that if North Korea engages in any act of violence against the United States or its allies, it would have to face a massive military response.

On Aug 29, North Korea had fired a missile that passed over Hokkaido, Japan. Japan’s Prime Minister, Shinzo Abe, called the incident an exceptional, serious and severe threat to his own country. The U.S. President also responded by saying that he has “all options on table” when it comes to dealing with Pyongyang.

Our Choices

As Trump pledges to expand the U.S. Armed Forces, defense stocks will shoot up. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Boeing Co. (BA Quick QuoteBA - Free Report)  is a defense giant. The aerospace company's segments include Commercial Airplanes, Defense, Space & Security (BDS), such as Boeing Military Aircraft (BMA), Network & Space Systems (N&SS) and Global Services & Support (GS&S), and Boeing Capital (BCC).

Boeing has a Zacks Rank #2 (Buy). Its expected earnings growth for the current year is 29.2%. The Zacks Consensus Estimate for current-year earnings increased 5.8% over the last 60 days. The company has returned 55.4% year to date, outperforming the industry’s 28.1% growth.

Huntington Ingalls Industries Inc. (HII Quick QuoteHII - Free Report)  is a military shipbuilding company and provider of professional services to partners in government and industry.

The stock carries a Zacks Rank #2. Its expected earnings growth for the current year is 14.2%. For the current year’s earnings,the Zacks Consensus Estimate has increased about 3% over the last 60 days. The company has bettered the industry year to date with 28.1% gains compared with 14.3% added by the latter.

Leidos Holdings, Inc. (LDOS Quick QuoteLDOS - Free Report)  provides technology and engineering solutions in the defense, intelligence, homeland security, civil, and health markets in the United States and internationally. Leidos Holdings has a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

The current year’s expected earnings growth for Leidos Holdings is 0.3%. The Zacks Consensus Estimate for the current year has increased 6.7% over the last 60 days. The stock is expected to gain 9.3% next quarter. Leidos has year-to-date returns of 11.8%.

Engility Holdings, Inc.  is engaged in providing government services in engineering, professional support and mission support to customers in the U.S. Department of Defense, Federal civilian agencies and allied foreign governments. 

Engility Holdings has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 5.7% over the last 60 days. The company’s expected earnings growth for the current year is 38.4%.

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