Arms Stock Investment Guide: Profit Opportunities in the Global Geopolitical Landscape

Why Should You Focus on Defense Stocks Now?

In recent years, regional conflicts have intensified repeatedly, from the Russia-Ukraine war to Middle Eastern tensions and the Taiwan Strait crisis. The nature of warfare has fundamentally changed. Unlike traditional combat that relies heavily on manpower, modern warfare increasingly depends on technology—drones, precision missiles, information warfare, and cyber defense have become key to victory. This transition has driven enormous demand for the defense industry.

Governments worldwide have also recognized this trend. Major countries like China, Taiwan, and the United States are continuously increasing their defense budgets. This growth trend has become a long-term norm. In the context of an aging population, countries prefer to invest in developing high-tech weapon systems rather than rely on large-scale manpower deployment. As a result, the defense industry is experiencing unprecedented growth opportunities.

Defense Stocks and Arms Stocks: Essential Knowledge Before Investing

What are defense stocks?

Broadly speaking, arms stocks include all companies that have business dealings with the defense department, whether they produce large-scale missile systems or small items like military water bottles and uniforms. As long as the customer is a government defense agency or related contractors, the company can be classified as a defense concept stock.

This broad definition introduces a key investment trap: not all companies labeled as “defense stocks” are worth investing in.

Three Core Principles for Stock Selection

First: The proportion of defense revenue must be sufficiently high

Many companies are labeled as defense stocks, but their military business accounts for less than 30%, with most revenue still coming from civilian markets. The stock performance of such companies is often dragged down by the civilian market, and growth in defense orders may not significantly boost overall profitability. Investing in these targets essentially bets on the prospects of their civilian business, not genuine defense industry growth.

Second: The company must align with future warfare needs

The direction of future warfare is clear—technology will far outweigh manpower. Air and naval forces will dominate strategic landscapes, while land-based orders may see limited growth. Therefore, companies focusing on drones, missile guidance systems, and communication technology have better prospects, whereas traditional land military equipment suppliers should be approached cautiously.

Third: Pay attention to changes in the company’s non-defense business

The painful lessons of Boeing and Raytheon show that stable growth in defense orders does not necessarily lead to stock price increases. Difficulties in the civilian aviation market, product defects leading to lawsuits, and goodwill impairments can offset the benefits brought by defense business.

In-Depth Analysis of U.S. Arms Stocks

Lockheed Martin (LMT): The Purest Defense Blue Chip

Lockheed Martin is one of the world’s largest defense contractors. Its main business includes fighter jets, missile systems, satellite technology, and other cutting-edge defense products, with a very high proportion of military revenue.

Long-term trends show Lockheed Martin’s stock price has an obvious upward trajectory, with corrections mainly due to broader market adjustments rather than deteriorating fundamentals. The company is profitable, with ample cash flow, representing a pure defense stock. For investors seeking stable growth, this is a key target worth close attention.

Northrop Grumman (NOC): Leader in Defense Technology

Northrop Grumman is the fourth-largest defense manufacturer globally and the largest radar producer. Its defense characteristics are authentic, with consistent profitability and a long-term upward stock trend confirming its investment value.

Notably, the company has increased dividends for 18 consecutive years, a benchmark in the defense industry. This year, it accelerated a $500 million share buyback plan, returning value to shareholders through stock repurchases. Against the backdrop of rising global strategic deterrence needs and fierce space and missile technology competition, Northrop Grumman possesses a deep technological moat with significant long-term investment potential.

General Dynamics (GD): Stable Cash Cow

General Dynamics is one of the top five U.S. defense suppliers, involved in land, sea, and air military sectors. Its unique advantage is that about a quarter of its revenue comes from civilian business (mainly Gulfstream jets), which becomes a strength—high-end civilian clients are less affected by economic fluctuations, ensuring revenue stability.

Having weathered the 2008 financial crisis and the COVID-19 pandemic, General Dynamics’ profitability has remained stable, demonstrating its anti-cyclical nature. The company has achieved 32 consecutive years of dividend increases, a feat only 30 U.S. companies have accomplished. The long service life of military aircraft and weapon systems allows the company to continuously improve profit margins through cost control. Additionally, it uses excess cash for stock buybacks, actively safeguarding shareholder interests. While growth may be limited, its deep moat makes it an ideal defensive investment.

Raytheon (RTX): Risks and Opportunities Coexist

Raytheon is a globally renowned defense giant with steady growth in military orders. However, its stock performance this year has been extremely weak, declining contrary to the global rebound in 2023. The main reason is its civilian aviation business facing difficulties.

Specifically, Raytheon supplies engine parts for Airbus A320neo aircraft made from rare powder metals, which carry a risk of fracture under high-pressure conditions. As airlines purchase new aircraft to meet strong travel demand, it is expected that over the next 3-4 years, about 350 A320neos will require re-inspection, with individual maintenance cycles possibly lasting up to 300 days. This issue has severely impacted Raytheon’s revenue and may lead to lawsuits from Airbus and potential customer loss. Until the civilian crisis is resolved, Raytheon’s stock outlook remains uncertain, and investors should remain patient and cautious.

Boeing (BA): Civilian Crisis Dominates Stock Price

Boeing operates both civilian and military sectors, but its stock plunge was entirely driven by the crisis in the civilian market. In 2018 and 2019, the 737 MAX series aircraft experienced consecutive accidents, leading to worldwide grounding, followed by pandemic impacts that drastically reduced profits. More critically, new competitors have emerged—amid U.S.-China trade tensions, the Chinese government has begun supporting domestic aircraft manufacturers, shifting from previous caution due to sanctions. Chinese commercial aircraft are gradually gaining market share globally, eroding Boeing’s previously dominant market share.

From a defense perspective, Boeing’s military revenue (including B-52 bombers, Apache helicopters, etc.) is expected to remain stable. However, the structural decline and risks in the civilian sector make Boeing a “buy-the-dip” rather than a chasing-up stock.

Caterpillar (CAT): Industrial Stock with Defense Aura

Caterpillar is often labeled as a defense stock, but in reality, military revenue accounts for less than 30%, with core business still in industrial engineering equipment. Even in wartime or after disasters, reconstruction equipment demand can boost performance.

Strictly speaking, Caterpillar is both a defense stock and not entirely a defense stock. Its outlook mainly depends on global infrastructure investment levels and raw material demand. Many similar companies have fuzzy boundaries—for example, FedEx has contracted battlefield logistics, and some steel cup and boot manufacturers with defense-related business are classified as defense stocks.

Taiwan Defense Stocks: Beneficiaries of Geopolitical Bonuses

The Taiwan Strait situation has become a focal point of global geopolitics, with both sides increasing defense budgets. Local Taiwanese defense companies are benefiting from this.

Thunder Tiger (8033.TW): From Toy Maker to Defense Rising Star

Thunder Tiger’s development trajectory is quite representative. Originally focused on remote-controlled model aircraft for the toy market, the company successfully transitioned into the defense industry with the rise of drones, leading to a significant stock price increase in 2022. Looking ahead, as Taiwan and global military demands continue to grow, Thunder Tiger’s growth potential is worth期待。

Hanxiang (2634.TW): Diversified Business to Mitigate Risks

Hanxiang is another Taiwanese defense company worth noting. Its business covers both military and civilian sectors. The civilian side mainly involves aircraft maintenance and parts sales, with high customer stickiness; the military side focuses on trainer aircraft. The expansion of the drone market and post-pandemic tourism recovery have driven order growth.

Compared to Boeing and Raytheon, which have faced operational difficulties due to single products or brands, Hanxiang’s diversified business provides natural risk buffers. As long as the industry remains healthy, demand for maintenance and repair will increase, boosting performance. Therefore, Hanxiang’s stock performance is relatively stable, with better anti-cyclical resilience.

Why Are Defense Stocks Worth Long-Term Holding?

Borrowing Warren Buffett’s investment logic, good companies should meet three conditions: a sufficiently long runway, a deep moat, and a “snowball” effect. Defense stocks perfectly fit these criteria.

Super Long Runway: Eternal Market Demand

Throughout human civilization, many habits have been eliminated, but conflicts never cease. The demand for military defense is endless, giving the defense industry a super-long lifecycle. This eternal demand provides companies with a stable income foundation.

Deep Moat: Leading Technology and Political Barriers

Defense technology is at the forefront of human scientific research. Cutting-edge innovations often first appear in laboratories and military applications, with civilian use lagging years behind. National security concerns make entry barriers extremely high. Building trust takes years or even decades, and many patents involve national-level sharing agreements, making established leaders nearly irreplaceable.

Moist Snowball: Geopolitical Catalysts for Growth

Today’s world is entering an era of regional politics. U.S. policies of “reshoring” manufacturing have diminished the concept of a global village, prompting countries to increase military spending to strengthen defenses. Rising chances of conflict and investments in military modernization continuously drive growth for defense companies. The probability of negative events like disarmament is extremely low, so growth prospects are assured.

Final Advice for Investing in Defense Stocks

While the market demand for defense stocks is favorable, success hinges on picking the right companies. Before investing in any defense stock, clarify the following points:

Assess Defense Revenue Share — Military business must constitute the main part of revenue; otherwise, civilian market downturns can offset defense benefits.

Monitor Civilian Business Trends — Lessons from Boeing and Raytheon show that even with growing defense orders, civilian crises can destroy stock value. Regularly review the non-defense revenue segments.

Recognize a Company’s Moat — Favor companies with unique technologies, long-term government trust, and hard-to-copy advantages.

Maintain a Long-Term Holding Mindset — Defense clients are mainly governments, with stable and deep relationships, making the risk of company failure very low. This makes defense stocks ideal for buy-and-hold strategies.

By comprehensively evaluating a company’s financial health, industry trends, global geopolitical landscape, and civilian market changes, investors can make informed decisions and seize this generational investment opportunity.