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US May Exit Weapons Pact With Russia: 2 Defense Stocks to Buy

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President Donald Trump has decided to withdraw the United States from the landmark nuclear weapons deal signed with Russia in 1987 that banned both nations from owning, producing and test-flying nuclear missiles.

Trump’s announcement last week caused Russia to retaliate; saying that breaking the treaty “would be a very dangerous step.” Trump’s announcement comes at a time when U.S.-Russia relations are tumultuous over concerns of the latter’s superior S-400 missiles — its interference in the 2016 presidential votes and the imminent midterm elections.

The United States has been charging Russia of violating the arms treaty since 2014, stating that the country has been developing banned weapons. Russia has always denied the charges and accused the United States of infringing the contract instead.

While Trump’s recent decision may not be a welcome move for Russia, it could be a new chapter for domestic defense companies in terms of developing nuclear weapons. Therefore, it might be a good idea to invest in some defense stocks that stand to benefit the most.

America to Develop New Weapons

The 1987 Intermediate-range Nuclear Forces (INF) treaty was aimed at securing the United States and its European allies from the risk of nuclear attacks during the Cold War by making nuclear weapons out of bounds for the United States and Russia. The pact banned ground-launch cruise and ballistic missiles with ranges 500-5,500km.

But Russia’s S-400 missile, a surface-to-air missile system developed by the Almaz Central Design Bureau, poses serious threat to the United States and other North Atlantic Treaty Organization (NATO) members as none possess the means to destroy it. the United States had previously blamed Russia for developing 9M729, a cruise missile, which breached the nuclear weapons pact. Russia’s advanced weaponry has therefore given rise to the need for equally well-equipped military gears in the United States.

Addressing a rally in Nevada on Oct 20, Trump said, “Russia has violated the agreement. They have been violating it for many years. And we’re not going to let them violate a nuclear agreement and go out and do weapons and we’re not allowed to.” The President added that it was unacceptable if Russia and China are developing weapons but the United States was abiding by the agreement. The treaty doesn’t include China though.

“We’ll have to develop those weapons. We’re going to terminate the agreement and we’re going to pull out,” Trump said.

While the geopolitical tensions, which triggered the nuclear arms pact in 1987, have long been over, the threat from Russia’s superior weapons remains to be addressed. As a result, the United State’s development of new weapons seems apt at a time when tensions with Russia have mounted not only over security and political issues, but also over conflicts in Syria and Ukraine.

Before we recommend the stocks that have direct exposure to nuclear weaponry projects in the United States and are well positioned to benefit, let’s focus on a few companies that are involved in similar projects.

According to a report by dontbankonthebomb, Lockheed Martin (LMT - Free Report) is responsible for the construction of submarine-launched Trident II D5 nuclear missiles and manufactures and maintains nuclear weapons for both the United States and United Kingdom. Boeing (BA - Free Report) maintains about 500 Minuteman III nuclear intercontinental ballistic missiles in U.S. weaponry and Honeywell (HON - Free Report) conducts simulated nuclear tests and longevity programs for U.S. navy’s Trident II nuclear missiles.  

Defense Stocks to Buy

Here are a couple of stocks that could gain if the United States starts developing new weapons.

Northrop Grumman Corporation (NOC - Free Report) is a leading security company worldwide that provides products, systems and solutions in autonomous systems, cyber; command, control, communications and computers, intelligence, surveillance, and reconnaissance; strike; and logistics and modernization in support of global customers.

According to the dontbankonthebomb report, the company leads a joint project that produces and maintains Minuteman III nuclear intercontinental ballistic missiles for the United States. Northrop Grumman’s earnings are expected to grow 27.1% for 2018. Over the last 30 days, the company’s earnings estimates for the current year have been revised 0.2% higher. The stock carries a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Raytheon Company (RTN - Free Report) is a leader in technology and innovations and provides its products and services to defense and other government markets worldwide. It develops technologically advanced and integrated products, solutions and services.

Last year, U.S. Air Force awarded Raytheon and Lockheed Martin with contracts worth $900 million dollars each to replace an ageing nuclear weapons system. The companies are developing a new long range stand-off weapon that demands advanced design concepts and technologies, according to WND. Raytheon’s earnings are expected to grow 30.3% for the current year and its earnings estimates haven’t changed for 2018 over the past four weeks. It also carries a Zacks Rank #2.

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