By Philip van Doorn
No matter when the shooting stops and Russia’s war in Ukraine comes to an end, it seems clear from actions taken by European countries that we’re entering a period of increased defense spending.
Below is a screen of aerospace and defense stocks of European and U.S. companies, showing the ones most favored by analysts polled by FactSet.
The STOXX Europe Total Market Aerospace and Defense Index has risen 5% this year and is up 14% from its 52-week low on Dec. 15. You might be surprised to see that the index is actually down 20% from its high on Feb. 11, 2020. Here’s a 10-year chart:
Meanwhile, the S&P 500 aerospace and defense subsector is up 11% for 2022, up 23% from its 52-week intraday low on March 3, 2021, and down 5% from its 10-year intraday high on Feb. 10, 2020.
Here’s a 10-year chart for the S&P 500 aerospace and defense subsector:
Aerospace and defense stock screen
With political attitudes changing in Western countries, a long-term increase in defense spending seeming likely, and defense stocks not having risen as much as might have been expected after Russia launched a major war in Europe, this is a good time for investors to consider this subsector.
In order to come up with a broad list of stocks to screen, we began with the 25 companies in the STOXX Europe Total Market Aerospace and Defense Index and then added the components of these two U.S. ETFs:
The iShares U.S. Aerospace & Defense ETF /zigman2/quotes/207320401/composite ITA +0.06% has $2.72 billion in assets and holds 32 U.S. stocks. It is highly concentrated, as the stocks are weighted by market capitalization with a cap at 22.5% for any one holding when the portfolio is rebalanced quarterly. According to FactSet’s most recent data, Raytheon Technologies Corp. /zigman2/quotes/203237915/composite RTX -0.65% , makes up 22.9% of the portfolio and the top five holdings make up 55% of the portfolio.
The SPDR S&P Aerospace & Defense ETF /zigman2/quotes/203252291/composite XAR +0.64% takes a more balanced approach, aiming for a portfolio with a mix of 40% large-cap stocks, 40% mid-cap stocks and 20% small-cap stocks. The fund holds shares of 30 U.S. companies and its top five holdings make up 24% of the portfolio.
Adding together the holdings of the two U.S. ETFs, removing duplicates and then adding the components of the STOXX Europe Total Market Aerospace and Defense Index produces a list of 60 companies.
Among the 60 companies, 42 are covered by at least five analysts polled by FactSet.
Narrowing further, here are the 10 aerospace and defense stocks with majority “buy” or equivalent ratings that analysts expect to rise the most over the next year. Share prices and price targets are in local currencies where the shares are listed:
|Company||Ticker||Country||Share “buy” ratings||Closing price – March 2||Consensus price target||Implied 12-month upside potential|
|Avio SpA||/zigman2/quotes/208024470/delayed IT:AVIO||Italy||60%||11.00||15.24||39%|
|Axon Enterprise Inc.||/zigman2/quotes/208329414/composite AXON||U.S.||100%||144.61||196.60||36%|
|Airbus SE||/zigman2/quotes/208224336/delayed FR:AIR||Netherlands||91%||109.68||148.16||35%|
|Boeing Co.||/zigman2/quotes/208579720/composite BA||U.S.||69%||197.81||259.00||31%|
|Spirit AeroSystems Holdings Inc. Class A||/zigman2/quotes/205043289/composite SPR||U.S.||84%||46.95||60.81||30%|
|Avon Protection PLC||/zigman2/quotes/209664543/delayed UK:AVON||U.K.||57%||12.62||16.21||28%|
|Safran S.A.||/zigman2/quotes/206963350/delayed FR:SAF||France||67%||108.26||131.18||21%|
|Kratos Defense & Security Solutions Inc.||/zigman2/quotes/201233073/composite KTOS||U.S.||64%||19.35||23.05||19%|
|RBC Bearings Inc.||U.S.||63%||196.00||232.67||19%|
|BWX Technologies Inc.||/zigman2/quotes/200150322/composite BWXT||U.S.||71%||53.03||62.71||18%|
Click on the tickers for more about each company.
Click here Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.