North Korea’s missile test on Aug 10 once again flared up the longstanding tension between the United States and North Korea. The latest firing is the fifth short-range missile test that the country has carried out since Jul 25.
While it is not a comforting news as far as the nations’ socio-political ties are concerned, major U.S. defense contractors have reason to cheer as the conflict may boost demand for weaponries.
Rationale Behind the Weapons Testing
Cross-border tensions between the United States and North Korea hit headlines in the recent past, particularly in the past couple of years. Both the nations have conducted counter missile tests. However, a settlement agreement of denuclearization signed by U.S. President Donald Trump and his North Korean counterpart Kim Jong-Un in Singapore, in June 2018, brought some relief.
To everyone’s surprise, the two primary aspects of the agreement were Jong-Un’s renewed commitment to complete denuclearization of the Korean Peninsula and Trump’s promise to pull out thousands of troops stationed in South Korea. Nevertheless, the recent revelation that the U.S. and South Korean militaries are planning to carry out a joint exercise in August reignited tensions between America and North Korea.
North Korea justified its recent act of consecutive missile tests as a means to put pressure on Seoul and Washington to stop such joint drills, which it presumably sees as a breach of last year’s agreement. In fact, per a report by Reuters, Pyongyang has accused Washington of breaking its promise by planning the military exercises and warned that the drills could derail talks of denuclearization.
Will Defense Stocks Gain?
The series of missile tests by North Korea threatens America’s security and the country may respond with counter missile tests and other tactical weaponries, thereby offering a solid impetus to a number of U.S. defense majors.
Analysts expect more such missile tests by North Korea in the coming days in a bid to keep Washington under pressure, which, in turn, would keep the tension alive in the Korean Peninsula that has been brewing over the past couple of weeks. Moreover, North Korea has not showed any intent in terms of progressing with denuclearization. So, any near-term improvement in the relations between these two nations is highly unlikely.
U.S. defense bellwethers are poised to benefit from the rising geopolitical tensions as the government will look to strengthen its arsenal. Considering this, we have selected five defense primes that have witnessed share price increase since Jul 25. These players also boast a favorable Zacks Rank and other fundamentals.
Northrop Grumman’s (NOC - Free Report) shares have risen 4.5%. This Zacks Rank #2 (Buy) company has a long-term earnings growth rate of 12.4%. The Zacks Consensus Estimate for its current-year earnings has increased 1.6% over the last 90 days.
Aerojet Rocketdyne’s (AJRD - Free Report) shares have gained 11.6%. This Zacks Rank #1 (Strong Buy) stock boasts a long-term earnings growth rate of 5.5%. The Zacks Consensus Estimate for current-year earnings increased 13.8% over the last 90 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lockheed Martin’s (LMT - Free Report) shares have returned 1.9%. This Zacks Rank #2 company has a long-term earnings growth rate of 7.1%. The Zacks Consensus Estimate for its current-year earnings increased 3.8% over the last 90 days.
Leidos Holdings’ (LDOS - Free Report) shares have gained 3.9%. This Zacks Rank #1 company has a long-term earnings growth rate of 7.5%. The Zacks Consensus Estimate for its current-year earnings increased 2.2% over the last 90 days.
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