This article looks at the 10 best aerospace and defense stocks to buy now and identifies those that hedge funds are bullish about.
The world has been rocked with conflict over the last few years. The war between Russia and Ukraine has gone beyond 860 days, with no immediate end in sight. Azerbaijan and Armenia continue to engage in a regular exchange of fire after the latter lost control of the Nagorno-Karabakh region to the Azeris in 2020. The Middle East is up in flames, with defense experts describing the ongoing Israel-Hamas conflict as the worst crisis in the region since the Arab-Israeli War in 1973.
While the human impacts of war are undeniably tragic, it is also a time when defense companies make money and lure investors into loading up on their stocks. According to a report on CNN earlier this year, defense companies in the United States and Europe have thrived since Russia invaded Ukraine in February 2022. German automotive and arms manufacturer Rheinmetall’s share price had surged by a staggering 315% in two years following the start of the conflict, while BAE Systems posted a 105% gain. Northrop Grumman and Lockheed Martin also witnessed an increase in their share prices by 18% and 10%, respectively.
When the war broke out, industry analysts expected the aerospace sector to be affected by western sanctions placed on Russia. According to KPMG, the country is the source of 30% of the titanium used by Boeing and other large engine producers that power fighter jets and commercial aviation. Titanium is a key material that goes into the development of jet fan blades and landing gears. However, the supply of titanium from Russia to these companies has largely remained unaffected despite sanctions.
While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26, Tony Bancroft from Gabelli Funds said that he had noticed a significant growth in aircraft orders lately, with both Airbus and Boeing having a 12-year backlog of orders. He believes there are three reasons driving it. The first catalyst, according to him, is China which accounts for 20% of the growth in orders to cater to the growing middle class in both China and India who want to travel more. Another critical factor he cited during his talk was that business travel has finally returned to the 2019 pre-pandemic level. Lastly, Tony highlighted the the rising middle class in the United States, and the world, which is increasing air travel and contributing to the economic growth in the industry.
Furthermore, Bancroft identified Textron as his hot stock pick in the aerospace and defense industry. He believes the stock is undervalued at its current share price of $85, and anticipates its value to hover around the $125 range in the future. Last year in March, the US Department of Defense (DoD) awarded a $1.3 billion contract to the company to develop helicopters to replace the aging Blackhawk fleet.
Another top stock that hedge funds are talking about is Carpenter Technology Corporation, a leading supplier of specialty alloys that holds a market share of roughly 40% in the aerospace industry. It was among the top picks during the Sohn Investment Conference in New York back in April. Mohammed Anjarwala, the managing director of Advent Global Opportunities, shared the following remarks about the company during the conference:
We think Carpenter is one of the best ways to play the growing backlog of planes at Boeing and Airbus, as they ramp up their billing rates.
At the time of the conference, the stock was trading at around $70 per share. Anjarwala forecasted that the value could go up to around $200 per share or 20 times forward P/E. It is currently valued at $107 per share.
Do Textron and Carpenter Technology make the list of the best aerospace and defense stocks to buy according to hedge funds? Let’s take a look.
Jordan Tan / Shutterstock.com
Methodology
Insider Monkey’s database of 920 hedge funds was assessed, as of the first quarter of 2024. We have chosen the 10 best aerospace and defense stocks to buy now based on the hedge fund sentiment towards each stock. The stocks are ranked in ascending order of hedge fund holders in each company.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Let’s now head over to the list of the best stocks to buy in the aerospace and defense industry.
10 Best Aerospace and Defense Stocks to Buy Now:
10. Woodward, Inc. (NASDAQ:WWD)
Number of Hedge Fund Holders: 37
Woodward, Inc. (NASDAQ:WWD) is an aircraft engineering company that provides solutions and sells control system components for aircraft engines, industrial engines, turbines, power generation, and mobile industrial equipment. Founded in Illinois in 1870, the billion-dollar company today has a presence worldwide, including in China, Japan, and Europe. During the second quarter of 2024, the company reported its EPS at $1.62 per share, smashing analyst expectations of $1.28. Woodward, Inc. (NASDAQ:WWD) generated earnings of $98 million in its aerospace segment – which was 34% higher YoY and driven primarily by net price realization and an increase in aircraft utilization to cater to the growing demand for travel.
Besides the general interest among buyers in the company’s aerospace parts, strong financial results during the last quarter were also significantly contributed by the growing demand for on-highway natural gas trucks and bus powertrains in China. The industrial segment generated quarterly revenue of $338 million, up from $281 million, resulting in $65 million in earnings for the quarter. However, the company expects on-highway sales in China to slow down during the third quarter, and not grow at the same pace as they have in the last several quarters, due to China’s changing market dynamics. The effects of that were observed when investors lost 3.5% during the last week of June, but it could be argued that the hiccup was offset by longer-term gains.
Woodward, Inc. (NASDAQ:WWD)’s share price has grown by over 47% last year. This year alone, it has attracted investments from notable financial institutions such as Baader Bank AG and Quest Partners LLC, reflecting continued investor confidence. Woodward, Inc. (NASDAQ:WWD) over the years has also earned the reputation of being a leader in energy conservation in the aerospace and industrial markets, with a focus on building a decarbonized, cleaner, and sustainable world. As part of this process, it has forged strategic partnerships with companies like Airbus and Rolls Royce to work on projects such as developing Fuel Cell Balance of Plant (BoP) and methanol engines to reduce greenhouse gas emissions. The company can build on this positive reputation to further drive sales and attract investments.
According to Insider Monkey, 37 hedge funds are bullish about the stock. There is also consensus among analysts over the Buy rating of the stock, with an average share price target of $178, an upside of 0.74%. The company’s management is optimistic about the overall performance during the fiscal year. Chief Financial Officer, Bill Lacey, shared the following remarks in Woodward, Inc. (NASDAQ:WWD)’s Q2 2024 Earnings Call:
“For fiscal 2024, Aerospace sales growth is now expected to be 12% to 14% and segment earnings are still expected to be 18% to 19% of sales. For fiscal 2024, we now expect industrial sales growth to be 13% to 15% and segment earnings to be 17% to 18% of segment sales. At the Woodward level, the adjusted effective tax rate is now expected to be approximately 20%. We expect adjusted free cash flow to now be between $325 million and $375 million. Capital expenditures are still expected to be approximately $100 million. Adjusted earnings per share is now expected to be between $5.70 and $6 based on approximately 62 million fully diluted weighted average shares outstanding.”
9. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 39
Northrop Grumman Corporation (NYSE:NOC) is one of the largest weapons manufacturers and military technology providers in the world. It is also among the top defense contractors in the industry in terms of revenue and DoD contracts. The company is the manufacturer of the long-range, stealth strategic bomber, the B-21 Raider, for the United States Air Force (USAF), which was formally unveiled in December 2022 and is scheduled to enter service from the mid-2020s onwards. The aircraft, which is still under development, is intended to replace the aging fleet of the B-1B Lancer and B-2 Spirit.
Northrop Grumman Corporation (NYSE:NOC)’s share price was bludgeoned during the fourth quarter of FY 2023, after the B-21 faced a cost overrun worth $1.6 billion, raising concerns among investors about the expense of the program, which has been spiraling since 2015. As a result, the company posted a loss of $1.45 per share against forecasts of EPS of $5.80. The company fared much better and turned things around during the first quarter of 2024, generating $10.1 billion in revenue, which is 9% higher YoY, and an EPS of $6.32 beating analysts’ estimates of $5.83 per share for the quarter. The recovery was driven by the aerospace sector, where sales grew 18% due to a higher volume on the B-21 program and work on mature production programs such as the F-35. Defense systems, mission systems, and space-related sales also experienced growth during the quarter.
However, the crisis late last year on the B-21 Raider program has opened the doors of criticism, with debates on whether the USAF needs the aircraft at all at a time when drone warfare is on the rise, and the country already operates the world’s only stealth bomber, the B-2 Spirit. Rating firm Bernstein is bearish about Northrop Grumman Corporation (NYSE:NOC) and recently its analyst, Douglas Harned, downgraded the stock from Buy to Hold, in line with the ratings maintained by Wells Fargo and RBC Capital. Moreover, according to Insider Monkey, the number of hedge funds that are bullish on the stock has also come down from 45 in Q4 2023 to 39 in Q1 2024.
Despite the challenges with the B-21 program, Northrop Grumman Corporation (NYSE:NOC) remains one of the best aerospace and defense stocks to buy now, with an average price target of $503 per share at an upside of 16.62% from its current level. The company has projected sales of between $40.8 billion and $41.2 billion for FY 2024, owing to sustained demand for its weapons. Furthermore, the USAF has also agreed to a higher cost ceiling for the B-21 Raider in response to Northrop Grumman Corporation (NYSE:NOC) taking a loss last year. The aircraft is currently in the flight testing phase, and on track to enter service.
8. L3Harris Technologies, Inc. (NYSE:LHX)
Number of Hedge Fund Holders: 42
L3Harris Technologies, Inc. (NYSE:LHX) is a well-heeled American defense company, known for its wireless and night vision equipment, command and control systems, avionics, and terrestrial and spaceborne antennas. Formed in 2019 after a merger between Harris Corporation and L3 Technologies, it is among the top defense contractors in the United States. The company is favored by institutional investors, that own 85% of the company. While this is encouraging in terms of its share price stability, their large stake also makes the company more vulnerable to their trading decisions.
During the first quarter of the year, L3Harris Technologies, Inc. (NYSE:LHX) reported an EPS of $3.06, beating analysts’ forecasts by 15 cents. This was a 7% increase YoY, driven by strong segment operating margin performance, according to the company’s Q1 2024 Earnings Call. After a solid start to the year, the management revised their EPS guidance for FY 2024 to between $12.70 and $13.05 per share.
The company has made some crucial decisions over the past few months to overcome economic and supply chain challenges. In April this year, L3Harris Technologies, Inc. (NYSE:LHX) announced to lay off 5% of its workforce to manage costs and enhance operation efficiencies, as part of its LHX NeXt initiative to have $1 billion in cost savings by 2026. Moreover, late deliveries of satellite buses from Moog Inc had jeopardized the company’s ability to meet its commitments to the SDA’s missile tracking constellation, so it decided to replace Moog Inc. with Maxar as the supplier, which signaled the company’s proactiveness in addressing challenges.
L3Harris Technologies, Inc. (NYSE:LHX) is one of the best aerospace and defense stocks to buy now, with 42 hedge funds optimistic about the company’s prospects, according to Insider Monkey. There is a consensus among industry analysts on the stock’s Buy rating, with an average share price target of $237, at an upside of 1% from its current level.
7. Howmet Aerospace Inc. (NYSE:HWM)
Number of Hedge Fund Holders: 44
Howmet Aerospace Inc. (NYSE:HWM) is an American aerospace manufacturer of components for aircraft engines, fasteners, aluminum wheels for trucks, and titanium structures for aerospace applications. The company has 27 facilities across the world, including in the United States, the United Kingdom, China, Japan, and Brazil. It was recently listed by Insider Monkey among the top undervalued stock picks for the third quarter of 2024. The company is also one of the best aerospace and defense stocks to buy now, with 44 hedge funds bullish about the company.
During the first quarter of the year, Howmet Aerospace Inc. (NYSE:HWM)’s EPS was reported at $0.57, which was higher than analyst expectations of $0.52. This was despite the challenge created by the Boeing 737 Max at the beginning of the year. The incident has led to a decrease in production volume for the aircraft to well below the initial target of 38 aircraft per month. Howmet Aerospace Inc. (NYSE:HWM), however, was quick to adjust and replan for the year, reducing builds to about 20 per month. Moreover, strong Airbus production, growing 9% YoY, coupled with the diversity of the company’s revenue products meant that Howmet Aerospace Inc. (NYSE:HWM) largely managed to remain unscathed from the Boeing crisis.
The company’s share price has soared since the announcement of strong first-quarter results, having increased by more than 20% in value. There is consensus among most analysts about the stock’s Buy rating, with an average price target of $90, which will be an upside of 12.24% from its current level.
6. Lockheed Martin Corporation (NYSE:LMT)
Number of Hedge Fund Holders: 47
Lockheed Martin Corporation (NYSE:LMT) is the largest defense contractor in the world, with over $67 billion in revenue in 2023, of which defense-related sales contributed 96%. The company was formed in 1995 after the merger between Lockheed Corporation and Martin Marietta and is famed for manufacturing several notable aircraft over the past decades, including the F-35 fifth-generation fighter jet. The corporation has worldwide interests and is the biggest recipient of DoD contracts in the United States.
Since the start of Russia’s invasion of Ukraine in February 2022, Lockheed Martin Corporation (NYSE:LMT)’s share price has soared 29%. The stock is set for further gain with no end to the conflict in sight coupled with the aggravating situation in the Middle East. Earlier this year in April, the US government announced $61 billion in fresh aid for Ukraine and $26 billion for Israel. Most of the funds are likely to go into the procurement of pricey military equipment from companies such as Lockheed Martin Corporation (NYSE:LMT). During the first quarter of 2024, the defense contractor posted an EPS of $6.39 per share, beating analyst estimates of $5.8, driven by strong demand for its weapons, especially HIMARS, GMLRS, and the F-35.
Analyst ratings for the stock fluctuate between Hold and Strong Buy, with an average share price target of $502, which is 9% higher than its current level of $460 per share. On the other hand, 47 hedge funds are bullish on the stock, according to Insider Monkey, making it one of the best aerospace and defense stocks to buy now. Maria Ricciardone, Vice President, Treasurer, and Investor Relations shared confidence about Lockheed Martin Corporation (NYSE:LMT) being on track to meet full-year targets in the company’s Q1 2024 Earnings Call:
Highlights include robust funding for munitions multi-year procurement, continued investment in hypersonics and classified activities, and ongoing support for programs such as Black Hawk, CH-53K heavy lift helicopter, the fleet ballistic missile, C-130, and F-35. There were also additions to the original budget submission, including F-35 aircraft, C-130, and combat rescue helicopters. The initial budget request for FY2025, while still very early in the process, continues support of many of these same major programs, including the F-35, CH-53K, UH-60M, and others. In addition to emphasis on advanced munitions programs such as JASSM, LRASM, PrSM, Javelin, Daimler, and PAC-3, as well as hypersonic conventional prompt strike and the long-range hypersonic weapon.
5. HEICO Corporation (NYSE:HEI)
Number of Hedge Fund Holders: 52
HEICO Corporation (NYSE:HEI) is a US-based aerospace and electronics company that manufactures equipment used in aircraft, defense machinery, and telecommunication systems. The company is organized into two segments: Flight Support Group and Electronic Technologies Group. The Flight Support Group is recognized globally as the premier provider of aircraft parts and repair solutions. Most major airlines in the world today are customers of HEICO Corporation (NYSE:HEI)’s Flight Support Group. The business division does not only sell HEICO’s new parts, design, manufacturing, and repair services, but also non-HEICO-made parts to its customers.
During the second quarter of FY24, HEICO Corporation (NYSE:HEI) generated a revenue of $955.4 million, which was 0.44% higher than forecasts of $951 million. The company also beat analysts’ earning expectations by 7.5%, and posted an EPS of 88 cents. The results were owed to an increased demand for its commercial aerospace products. This was the fifteenth straight quarter in which the HEICO Corporation (NYSE:HEI)’s flight support group registered growth in sales. HEICO Corporation (NYSE:HEI)’s share price has increased 32% over the past year, and it is one of the best aerospace and defense stocks to buy now with 52 hedge funds bullish about the stock as of Q1 2024, according to Insider Monkey.
Experts believe that investing in HEICO is less risky than other companies in the aerospace and defense industry because of its wide variety of customers. No single customer has accounted for over 10% of HEICO’s revenue in the last three years, and therefore, if a customer’s business goes through a rough phase, it won’t be catastrophic for the company. There is consensus among analysts on the stock’s rating being a Strong Buy, with an average share price target of $233.5 at an upside of 3.73% from its current trading value.
4. The Boeing Company (NYSE:BA)
Number of Hedge Fund Holders: 54
The Boeing Company (NYSE:BA) is a leading aerospace company that manufactures commercial airplanes, space systems, and defense products for customers in more than 150 countries. As of 2022, it is the fifth largest defense contractor in the world, with defense-related sales of $31 billion, representing nearly half of the company’s overall revenue. The company has been under severe pressure after a door plug of an Alaska Airlines 737 Max 9 flight fell off after takeoff in January. It was the worst possible start to the year for the aerospace giant. Since the incident, there has been a slowdown in the production of airplanes, with an increased focus on safety.
As a result, during the first quarter of 2024, the company reported a net loss of $355 million. This, however, was less than the loss industry analysts anticipated, resulting in a negative EPS of -$0.56 against forecasts of -$1.43. The Boeing Company (NYSE:BA)’s financial performance during the quarter has shown resilience and signs of improvement, marked by a resurgence across the aviation industry. Despite that, Moody’s Investors Service is reportedly concerned that Boeing will struggle to deliver the 737 volumes that it requires to sell to retire debt and expand its free cash flow. Another bear case against the company is the executive-level shake-up that is taking place, causing consternation among some investors.
Most experts, however, believe that it is too big a company to fail, and with a backlog of orders worth $500 billion and international travel growing every year, The Boeing Company (NYSE:BA) is likely to turn things around in 2025 after the headwinds are over. The aerospace giant is also working on several defense-related projects, including the US Air Force’s Next Generation Air Dominance (NGAD) program, which aims to develop a sixth-generation fighter jet to replace the F-22 Raptor by 2030.
The stock’s analyst ratings range between Hold to Strong Buy, with an average price target of $223, at an upside of 24.5% from its current level. Furthermore, while hedge fund sentiment has decreased since the last quarter of 2023, there is still a sizable number of hedge fund investors in the stock, making The Boeing Company (NYSE:BA) one of the best stocks to buy now in the aerospace and defense industry.
3. General Dynamics Corporation (NYSE:GD)
Number of Hedge Fund Holders: 54
General Dynamics Corporation (NYSE:GD) is the sixth largest defense contractor in the world and is renowned for being the manufacturer of the Virginia class of submarines operated by the US Navy. It is also the primary contractor of the Columbia-class project. There are ten business units in the company operating under the segments of aerospace, marine systems, combat systems, and technologies. It is one of the best aerospace and defense stocks to buy now, with 54 hedge funds bullish about the company’s prospects, according to Insider Monkey’s database as of Q1 2024.
During the first quarter of the year, the company reported an EPS of $2.88, which was 9.5% higher YoY, but seven cents lower than analysts’ expectation. Revenues and operating earnings were 8.6% and 10.4% higher compared to last year, driven by sustained demand for fleet replenishment, Abram tanks, and other combat systems. The overall results, while robust, fell slightly short of the company’s forecasts. The reason behind this was that the forecasted delivery of 15-17 G700s did not take place during the quarter because the company received the FAA certification towards the very end of the quarter.
The good news, though, is the certification is here, and the deliveries have started. The company plans to deliver 50-52 of these planes over the quarters ahead, with improving margins as time progresses, implying that overall costs will be slightly higher during Q2, before easing out in the second half of the year. General Dynamics Corporation (NYSE:GD)’s figures for the combat systems also continue to increase due to a sustained demand for tanks from European countries. The business division has received orders worth more than $1 billion since Q1 2023 from the United States and its allies, primarily in response to Russia’s aggression in Ukraine. Revenues contributed by the company’s marine systems also grew 11.3% YoY, predominantly owed to the Columbia-class construction.
General Dynamics Corporation (NYSE:GD)’s share price has increased 33% over the past year due to the reasons stated above that drive demand for the company’s products. There is consensus among analysts on the stock’s buy rating, with an average share price target of $307, an upside of 8%.
2. RTX Corporation (NYSE:RTX)
Number of Hedge Fund Holders: 62
Formerly known as Raytheon, RTX Corporation (NYSE:RTX) is a giant in the global aerospace and defense industry. The company’s products generally complement Lockheed Martin’s offerings, such as preparing missiles for Lockheed’s fighters to ensure they remain a lethal threat. Since the beginning of the Ukraine war in February 2022, the stock’s share price has grown by over 15% due to a high demand for its weapons.
The ongoing conflicts in Europe and the Middle East have led to a robust first quarter of the year for RTX Corporation (NYSE:RTX), with sales increasing 12% compared to last year, to a total of $19.3 billion, and EPS posted at $1.34 per share, which is 10% higher YoY. The company has reaffirmed its forecasts for the full financial year, where it expects total revenue between $78-79 billion, and an EPS in the range of $5.25 – $5.40. According to Insider Monkey, 62 hedge funds are bullish on the company, making it one of the best aerospace and defense stocks to buy now.
Some investors, however, hold a bearish view of RTX Corporation (NYSE:RTX) after its aerospace subsidiary Pratt & Whitney discovered last year that several parts of its engine turbine discs were made using contaminated powder that makes metal parts susceptible to cracks and erosions. The management estimated a $3 billion pre-tax hit to cash flows between 2023 and 2025, but there was essentially no charge incurred in 2023, and the amount is now set to hit its numbers in 2024, 2025, and 2026.
Having said that, while headwinds undoubtedly exist, 2025 or 2026 is not the end of the road for RTX Corporation (NYSE:RTX). A major reason that speaks to the bull case for the company is its impressive backlog of $196 billion, of which $78 billion comprises defense-related orders, including a $2.8 billion guided-missile order by NATO. Most industry analysts have mixed views on the stock’s ratings, which range between hold to buy, with an average share price target of $102 at an upside of 0.4%.
1. TransDigm Group Incorporated (NYSE:TDG)
Number of Hedge Fund Holders: 78
TransDigm Group Incorporated (NYSE:TDG) is an American aerospace company headquartered in Cleveland that manufactures engineered aircraft components, such as avionics, pumps, and valves. It is the best aerospace and defense stock to buy right now, according to Insider Monkey’s database with 78 hedge funds bullish on the company, with their stakes collectively amounting to $6.62 billion. Mark Massey’s AltaRock Partners is the largest stakeholder among hedge funds in the company.
During the second quarter of the year, the company reported an EPS of $7.99, smashing estimates of $7.42 per share. President and Chief Executive Officer, Kevin Stein, credited the strong results in the quarter to the global commercial aviation trends, as the industry continues to recover and return to normalization amid an increase in demand for air travel. He also believes that there is much progress to be made ahead as OEM aircraft production rates are still well below the pre-pandemic levels.
Investors are optimistic about the growth prospects of TransDigm Group Incorporated (NYSE:TDG) as well. ClearBridge Global Growth Strategy stated the following in its first quarter 2024 investor letter:
U.S. aircraft parts manufacturer TransDigm Group Incorporated (NYSE:TDG) was our largest addition. TransDigm is a steady compounder with strong pricing power coming from regulatory barriers that limit the number of competitors and due to its proprietary intellectual property, which makes it a sole supplier of many certified aircraft parts. We believe the company will see long-term duration of growth ahead as it benefits from the expansion of the aerospace aftermarket and acquisitions in this still-fragmented space.
Moreover, there is consensus among analysts about the stock’s Buy rating, backed by an average share price target of $1,384, which is an upside of 11.5% from its current value. The price adjustments reflect recent developments such as the Calspan unit divestiture, acquisition of Raptor Scientific, and cash buy of CPI’s Electron Device Business, which are set to bolster TransDigm Group Incorporated (NYSE:TDG)’s financial outlook.
While we acknowledge the potential of aerospace and defense companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TransDigm Group but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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