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Defense Stocks to Consider as Geopolitics Simmer

Real Money's Kevin Curran says tensions in Central Asia, China and elsewhere mean opportunities for investors, but valuations are a concern.

With geopolitical tensions sharpening in China, Eastern Europe, and the Middle East, RealMoney's Kevin Curran points to defense companies as obvious benefactors. Investors, says Curran, should be looking at defense companies, too.

“Uncertainty in geopolitics is rarely a positive for investors, especially the scale of which we are seeing at present,” Curran wrote recently on Real Money. “Whether it’s still-simmering tension in Afghanistan after a U.S. exit, faltering authoritarian governments in Belarus and Kazakhstan, or the saber-rattling of Beijing over territories in the South China Sea, there is plenty to trouble one's mind.”

As many global governments bolster their own military capabilities, they’re turning to U.S.-based defense companies.

“In many cases, this includes significant purchases from U.S.-based aerospace and defense firms such as Northrop Grumman  (NOC) , Boeing  (BA) , Lockheed Martin  (LMT) , Raytheon  (RTX) , Textron  (TXT) , L3Harris Technologies  (LHX) , and General Dynamics  (GD) ,” Curran noted.

What’s more, defense companies should continue to prosper over the long haul.

"One of the attractive things about investing in the defense sector is that it's always there and over time it's always growing," David Luxton, Executive Chairman at weapons technology firm Kwesst Microsystems, told Real Money. "The times we're in are becoming more fragile and perilous geopolitically and I don't see that improving in the foreseeable future."

Add to the mix a $768 billion defense bill recently passed by the U.S. Senate and sent to President Biden's desk, and defense stocks appear to be a great landing stock for opportunity-minded investors.

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Still, risks are in play.

“To be sure, many of these tensions are not entirely novel and, after a strong year for many defense stocks, there is reason for caution on current valuations,” Curran said.

He points to comments from Andrew Shoemaker, Director of Investment Research at Capital Estate Advisors

"We feel that large-cap defense stocks are currently overvalued," Shoemaker told Real Money. "When looking for opportunities in defense, we have focused on small caps at this time because we feel that valuations are presently more reasonable at that market cap."

Shoemaker said that while he has liked Raytheon in the past, the entry point at present is not necessarily optimal. Further, he noted Science Applications International Corp.  (SAIC)   could well be an interesting investment, though, ideally, at more modest multiples.

"As an aside, we are keeping a close eye on Palantir  (PLTR) ," he added. "Their growth has been impressive."

As with anything in investing, homework will be paramount moving forward.

“That’s especially the case as investors attempt to parse the best contractors providing defense systems to an increasing number of governments eager to spend in the sector,” Curran said.

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