In a not so surprising move on May 8, the United States withdrew from the historic deal designed to contain Iran’s nuclear program. Further, a spate of other sanctions is likely to be slapped on the Middle Eastern country. President Trump has characterized the Iran nuclear agreement as a “horrible one-sided deal that should have never, ever been made.”
However, since the deal was suspended, defense stocks have rallied, primarily due to international geopolitical tensions that such developments give rise to. Investors can make the most of this opportunity to bet on the top defense stocks for alluring returns.
Geopolitical Tensions Post Trump’s Announcement
Quite expectedly, the sanctions and a complete annulment of the deal hasn’t gone down too well with Iran. The country has openly criticized such a decision by Trump, with its president Hassan Rouhani stating that Iran choses to stay in the deal even without the United States.
Adding to the already tense environment, state-governed media from Syria reported on the afternoon of May 8 that Israel had fired missiles on sites near Damascus that are linked to Iran. Further, Saudi Arabia stated on May 9 that its air force had neutralized two more ballistic missiles over its city Riyadh, apparently fired by Houthi rebels from Yemen.
Analysts fear that if the nuclear deal is not kept alive till the end of this year and if U.S. reimposes sanctions that were already in effect before the deal, the situation may worsen. Going by the trend, Trump is unlikely to budge from his decision and the nuclear deal might not make it through the next year. Such circumstances are likely to aggravate tensions to quite an extent.
Defense Stocks on a Tear
Defense heavyweights such as Lockheed Martin, Raytheon (RTN), Boeing, Northrop Grumman (NOC) and General Dynamics (GD) have rallied since Trump’s annulment of the deal. Between May 8 and May 11, shares of these giants have gained 1.4%, 2.6%, 1%, 1.7% and 2.4%, respectively, on the back of geopolitical uncertainties associated with such developments.
Defense contractors with significant exposure to the Middle East are poised to gain immensely from international tensions that are flaring up. Such companies will capitalize on increased orders for missile defense and tactical missile systems along with increased demand for ships and other aircraft equipment.
4 Hot Choices
With escalating international tensions and the unlikelihood of a reversal in Trump’s decision, it's not difficult to imagine why defense stocks might get a shot in the arm. In this context, we have selected four stocks that are expected to gain from these factors. These four stocks carry a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
L3 Technologies, Inc. (LLL - Free Report) is a provider of aerospace systems, communication, electronic, and sensor systems for military purposes as well as homeland security.
The company is based out of New York. The expected earnings growth rate for the current year is 13.78%. The Zacks Consensus Estimate for the current year has improved 1.9% over the past 60 days. L3 Technologies has gained 5.9% in the past six months.
Lockheed Martin Corporation (LMT - Free Report) engages in research, design, development and manufacture of aerospace systems and products.
The company is based out of Bethesda. The expected earnings growth rate for the current year is 19.70%. The Zacks Consensus Estimate for the current year has improved 2.7% over the past 60 days. Lockheed has gained 3.4% in the past six months.
The Boeing Company (BA - Free Report) engages in designing, developing, manufacturing and supporting commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems.
The company is based out of Chicago. The expected earnings growth rate for the current year is 20.80%. The Zacks Consensus Estimate for the current year has improved 3.5% over the past 60 days. Boeing has gained 31.4% in the past six months.
TransDigm Group Incorporated (TDG - Free Report) is a designer, producer, and supplier of aircraft components for both military as well as commercial purposes.
The company is based out of Cleveland. The expected earnings growth rate for the current year is 41.95%. The Zacks Consensus Estimate for the current year has improved 1.4% over the past 60 days. Boeing has gained 25.3% in the past six months.
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