2022 has been a very challenging year for investors due to the combination of a hawkish Fed and a slowing economy. The June CPI report also makes it clear that there is not going to be any immediate relief as the Fed is likely to ratchet up the hikes even at the expense of more economic pain.

One strategy for investors is to look for stocks that are insulated from economic and monetary stress. One of the sectors, with such characteristics, is defense and aerospace stocks. Their revenues are historically very stable especially as defense spending tends to consistently increase. This is, even more, the case with European countries ramping up defense spending following Russia’s invasion of Ukraine. 

The sector also has attractive valuations and would benefit from a decline in longer-term rates due to their strong balance sheets. Here are 2 top defense stocks that investors should consider buying:

Lockheed Martin (LMT)

LMT is a security and aerospace company that has four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space. The company produces high-tech weapons and defense systems but is best known for its F-35 fighter jets. In addition to these services, LMT provides a wide variety of services for governments all over the world.

In terms of the current environment, LMT is an ideal selection to ‘beat’ the bear market. For one, government budgets and defense spending are much less volatile than other parts of the economy. In fact, defense spending, on a global level, has grown at about an average, annual rate of 5% over the last couple of decades with the only dip being during the dissolution of the Soviet Union in the early 90s. 

Second, companies like LMT often receive long-term contracts and only have a few competitors given that these projects are quite sophisticated and require security clearance. They also tend to have large balance sheets and a long history of paying and raising dividends which also leads to outperformance during periods of economic turbulence.

LMT has an overall B rating, which translates to a Buy in our POWR Rating system. B-rated stocks have posted an average annual performance of 20.1% which compares favorably to the S&P 500’s annual performance of 8.0%. 

In terms of component grades, LMT has a B for Value due to its forward P/E of 14 which is cheaper than the S&P 500 (and less prone to negative revisions). It also has a B for Quality due to being one of the leading aerospace & defense companies. Click here to see more of LMT’s POWR Ratings.

Northrop Grumman (NOC)

NOC is one of the largest aerospace and defense contractors in the world with a $71 billion market cap. The company operates through 4 segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems. Its largest source of revenue is providing aircraft systems with tactical intelligence, weapon and mission systems for the military, radar, electro-optical/infrared, and acoustic sensors.

NOC certainly fits the criteria of a defensive stock as the company has consistently grown its revenues, earnings, free cash flow, and dividends. Over the last decade, each of these metrics is higher by 138%, 273%, 174%, and 207%. This is because defense spending continues to grow on an aggregate level, and NOC is one of the premier stocks in the sector.

Despite being a defensive stock, NOC does offer growth upside given its exposure to the space industry. Its customers include NASA and telecommunications companies as it provides services related to space logistics, satellite launches and maintenance, space security, and propulsion systems. Overall, the space industry is expected to reach a size of $1 trillion by 2040 and grow at a double-digit rate. 

NOC’s promising prospects are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. Given that the majority of Wall Street analysts covering the stock have a Buy rating and its history of dividend hikes, it’s not surprising that it has a B grade for Quality and Stability. Click here to see NOC’s complete POWR Ratings. 

LMT shares were unchanged in premarket trading Friday. Year-to-date, LMT has gained 14.12%, versus a -19.84% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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