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Defense Stocks Jump on Trump's NATO Success: 5 Top Picks

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On Jul 12, President Donald Trump in Brussels said that NATO allies have agreed to raise their defense spending to 2% of their GDP by 2024. The President further claimed that the NATO allies have committed to increase their military spending by an unprecedented amount and that many countries have agreed to reach that number sooner.

However, Trump’s claims of a number of allies agreeing to raise their defense spending beyond 2% were denied by French president Emmanuel Macron. Macron said that the allies have confirmed the goal of raising their military spending to 2% by 2024.

That said, Trump claimed victory in his efforts to convince the European allies to raise their defense spending. This saw a rally in defense stocks on Thursday, thus leading to a rebound in the markets that have been reeling under trade war fears. Given this scenario, it makes sense to add defense stocks to your portfolio at this point.

Trump Claims Victory at NATO

The issue of increasing defense spending has been a major point of contention between the United States and other members of the 29-member block. However, on Thursday morning, Trump said that the NATO allies have committed to raising their spending on defense to 2% of their GDP by 2024. NATO allies had made the pledge in 2014 but Trump claimed that many could reach that goal sooner.

However, Macron denied Trump’s claims saying that the goal remains the same as it was in 2014, that of reaching the 2% target defense spending by 2024. Interestingly, on Wednesday, Trump came up with the idea that the members of the bloc should up their defense spending to 4% of their GDP.

This initiated an emergency meeting among NATO allies on Thursday morning. However, in the evening, Trump said that the members would first reach the goal of 2% and only then talks of higher contribution would be initiated. Besides the United States, only four members — United Kingdom, Greece, Poland and Estonia — contribute 2% of their GDP to defense spending.

NATO Summit Becomes a Tense Affair

The NATO summit was a tense affair this time around, with Trump criticizing a number of countries for not raising their defense spending. Germany particularly was subject to Trump’s acquisitions. Currently, Germany spends only 1.1% of its GDP on defense although it had pledged to increase it to 1.5% by 2025 in May.

Reportedly, on the first day of the summit, Trump openly accused Germany of being controlled by Russia, as a number of oil and gas deals have given Moscow far more influence over Berlin. However, both Germany and Russia have denied such accusations.

Moreover, according to reports, Trump has made an informal suggestion to the NATO allies that they should double their defense spending from 2% to 4%. Understandably, Trump feels that the United States gets a bad deal from its allies. However, Trump claimed this to be a victory in convincing the NATO allies to reach their 2% goal by 2024, which saw defense stocks jumping on Thursday.     

Our Choices

The NATO summit was quite a charged-up affair at a time when U.S-Europe relations have already been soured by a trade spat. Now, increased spending on defense would mean greater demand for defense equipment, and more revenues for its players. So, it makes sense to add defense stocks to your investment arsenal at this point.

However, picking winning stocks may be difficult. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

CPI Aerostructures, Inc. (CVU - Free Report) CPI Aerostructures, Inc. comprises two distinct entities: CPI Aerostructures, Inc. and Kolar, Inc. CPI is engaged in contract production of structural aircraft parts and sub-assemblies for the commercial and military sectors of the aircraft industry. 

The company has an expected earnings growth of 32.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.9% over the last 60 days. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kratos Defense & Security Solutions, Inc. (KTOS - Free Report) is a specialized National Security Technology business providing mission critical products, services and solutions for United States National Security priorities. 

Kratos Defense & Security Solutions sports a Zacks Rank #1 and has an expected earnings growth of 58.3% for the current year. The Zacks Consensus Estimate for the current year has improved 5.6% over the last 60 days.

Northrop Grumman Corporation (NOC - Free Report) is a leading global security company offering a broad portfolio of capabilities and technologies that enable them to deliver innovative products, systems and solutions for applications that range from undersea to outer space and into cyberspace.

Northrop Grumman Corporation carries a Zacks Rank #1 and has an expected earnings growth of 25.1% for the current year. The Zacks Consensus Estimate for the current year has improved 3.6% over the last 60 days.

Wesco Aircraft Holdings, Inc. (WAIR - Free Report) distributes and provides supply chain management services to the global aerospace industry.

Wesco Aircraft Holdings has a Zacks Rank #2 (Buy) and an expected earnings growth of 30.5% for the current year. The Zacks Consensus Estimate for the current year has improved 4.1% over the last 60 days.

Lockheed Martin (LMT - Free Report) is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. 

Lockheed Martin carries a Zacks Rank #2 and has an expected earnings growth of 20.7% for the current year. The Zacks Consensus Estimate for the current year has improved 0.9% over the last 60 days.

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