Shares of Northrop Grumman, Lockheed Martin, General Dynamics and Textron are lagging their peers. So why is the defense industry group up more than 14% this year and among the top five industry groups?
The group's recent strength lies in smaller companies that provide support and innovative warfighting technologies. Shares of some European defense contractors also are lifting the group, as President Donald Trump presses its European allies to rely less on the U.S. for security.
"The underperforming have-nots are the big (defense) contractors, with meager share price gains so far this year, if any," wrote Yardeni Research editor Jackie Doherty in a report last week. "The outperforming haves are innovative defense tech companies redefining not only how war is waged in the AI era but how the (Pentagon) procures its weapons systems."
Drone and anti-drone technology, the use of artificial intelligence to guide and manage munitions, and the development of unmanned systems are capturing the imagination of war planners and investors.
The backdrop for defense stocks in general is favorable.
As Congress works through its budget and spending proposals for the year, Trump is seeking a 13% increase in defense spending. Geopolitical tensions have flared over recent, aggressive actions by China. The Ukraine-Russia was shows no sign of ending.
Yet, Northrop stock is trading below its converged 50-day and 200-day moving averages and has a Relative Strength Rating of 62 out of 99. General Dynamics faces resistance at its 200-day moving average and has a 55 RS Rating. Lockheed is above the 50-day line, but below the 200-day average with an RS Rating of 45. Textron's RS Rating is 31 as its shares are also sandwiched between the 50- and 200-day lines.
New Leaders In Defense Stocks
The highest-rated and best-performing defense stocks include names such as Espey, a Saratoga Springs, NY-based company that makes hardened power systems and electronics for military and commercial use. Optex Systems Holdings makes night-vision and other military optics. Both have top-notch 99 Composite Ratings but are thinly traded.
Heico, an aircraft repair and electronics company, also has a 99 Composite and is near record highs. The Florida-based company makes and services aircraft equipment, serving the majority of the world's airlines and overhaul shops. It also works with multiple defense and space companies and militaries around the globe.
Astronics has climbed six straight weeks and is up 20% from a breakout at a 26.63 buy point. Its Composite Rating is 99 too. Its military contracts include work for the Bell V-280 tilt-rotor aircraft for the U.S. Army. It makes test equipment, charging ports and other interior gear for passenger planes.
Howmet Aerospace (98 Composite) is up 26% from a 138.06 buy point the stock topped after a bullish earnings report May 1. The supplier of lightweight metals for aviation reported EPS gains of 40% to 54% the past four quarters. Sales climbed 6% to 14%, according to IBD MarketSurge.
Innovators Among Defense Stocks
"The excitement in the U.S. defense industry is centered squarely on defense tech, an area with small, relatively young, often privately held companies headed by tech gurus," Yardeni's Doherty said. "They're helping the U.S. military evolve from an organization focused on expensive hardware and manpower to an organization that's software centric."
Doherty cited Palantir as a prime example of AI innovation in the military. The stock, which is in IBD's enterprise software group, has 99 Composite and RS Ratings. Shares tried to clear an alternative 133.49 buy point but are down 4.7% Wednesday morning.
Some of the best-performing stocks in the defense industry hail from Europe. Government officials in that continent are raising military spending, approving a 150 billion-euro military spending package in May. The Trump administration has wavered in its support for Ukraine and is pressing European allies to spend more on their militaries.
U.S.-traded shares of Germany's Rheinmetall have more than tripled so far this year. U.K.-based BAE Systems are up 85% year to date, while Italy-based Leonardo has rallied 37%.
The U.S. Space Force announced this week it awarded a $1.2 billion contract to BAE Systems Space and Mission Systems to build 10 satellites for the next phase of its missile warning and tracking system, Aviation Week reported.
Two Big Defense Stocks Performing Better
A couple of the major U.S. defense and aerospace companies are measuring up with the smaller industry leaders.
Boeing shares are up more than 20% year to date and up 15% from the 184.40 buy point of a double-bottom base. After years of quality-control problems, the company is now able to increase production of its commercial jets. In March, Boeing won a contract to develop the F-47 next-generation fighter jet.
And RTX, whose businesses include Pratt & Whitney jet engines and Patriot air-defense missiles, is trading at all-time highs. The stock last month cleared a seven-week base and remains just above the 136.17 buy point.
