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Will Russia-Ukraine Conflict Benefit U.S. Defense Stocks?

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Over the last few days, cross-border tensions between Ukraine and Russia have escalated significantly after Russia fired on three Ukrainian vessels in the Kerch Strait off the Crimean Peninsula on Nov 25. President Putin’s army seized the vessels, along with its crew members, alleging that those vessels violated Russia’s territorial waters.

In retaliation, Ukraine has decided to ban Russian men of combat age from entering the country, following the imposition of the nation’s latest martial law. Ukrainian president Petro Poroshenko justified this move, indicating that it was made to prevent the formation of any more Russian-backed separatists’ groups, such as the ones formed in April 2014 to fight Ukrainian government forces in eastern Ukraine.

How did U.S. React?

The U.S. administration has taken very strong stance against this atrocious action of Russia. In particular, the U.S. Senate strongly condemned the provocative actions in the Kerch Strait against the Ukrainian navy and urged the government of Russia to immediately release all Ukrainian crew members and vessels. United Nations ambassador, Nikki Haley also strongly criticized Russia's “outrageous actions” against Ukraine and made requests of release. U.S. Senate, President Trump as well as Secretary of State Mike Pompeo also condemned Russia's actions in the Black Sea.

U.S.- Ukraine Relation

In December 2017, news released by the Washington Post confirmed that the U.S. State Department approved a commercial license authorizing the export of Model M107A1 Sniper Systems, ammunition, and associated parts and accessories to Ukraine, a sale valued at $41.5 million. This can be marked as the largest U.S. commercial sale of lethal defensive weapons to Ukraine since 2014. In May 2018, Congress approved military assistance worth $250 million to Ukraine in 2019, including lethal weaponry.

In September 2018, Kurt Volker, the U.S. special envoy for Ukraine, indicated that Washington is ready to expand arms supplies to Ukraine, to boost the country’s naval and air defense forces in the face of continuing Russian support for eastern separatists (per the Guardian). Volker also added that in self-defense, Ukraine may seek assistance and considering the Trump administration’s recent initiatives, we may conclude that the current U.S. government is willing to do so.

Defense Stocks to Keep an Eye on

The U.S. administration has not made any indication so far regarding ramping up sanctions against Russia for its "violation under international law". However, considering the current situation, it is possible that Ukraine may turn to the United States, seeking immediate military assistance in terms of arms supply. In fact, the country has urged NATO to deploy naval ships to the Sea of Azov amid a standoff with Russia.

Therefore, we believe that investors would be better off adding the following defense players to their portfolio. Each of the stocks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Being prominent missile makers, these companies are expected to be the preferred contractors of the U.S. administration, if Ukraine comes for help, as the adoption of missiles is more common in cross-border clashes.

The Boeing Company (BA - Free Report) : This renowned jet maker also manufactures missile defense systems like Ground-Based Midcourse Defense and a family of Laser & Electro-Optical Systems. It also produces the Missile Seeker for PAC-3 missiles.

Raytheon Company (RTN - Free Report) : It is a prominent missile maker in the United States. It manufactures a handful of notable missiles like Patriot, ESSM, the AMRAAM air-to-air missile and many more.

Lockheed Martin Corp (LMT - Free Report) : This military jet maker manufactures some of the prominent missile defense systems of the United States like THAAD missile, PAC-3 MSE, Aegis Combat System, MEADS and a few more.

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