War Stocks – 26/10: Best to Buy Now (Charts)

War stocks, also known as defense stocks, refer to publicly listed companies that are actively engaged in the aerospace, space, and defense sectors. They form the backbone of defending sovereign countries and territories. Many analysts expect demand to surge over the next decade amid rising global conflicts and geopolitical tensions.

Defense stocks provide long-term, reliable income streams for companies. They outperform during market corrections and bear markets, as short-term economic cycles have a minimal impact on their business model.

Despite popular opinion, conflicts do not move the price of defense stocks. There will be a short-term bounce, which usually falters. Investors must understand the long-term nature of defense stocks, where research and development (R&D) remain crucial. Conflicts boost demand for replenishing stockpiles and hardware, create opportunities to test new weapons platforms, and attract future buyers. Still, R&D and cybersecurity services are where defense stocks receive their best margins.

Here are a few things to consider in evaluating defense stocks:

• The defense sector is seeking green alternatives, and stocks with a lead in sustainability could outperform peers.
• Focus on defense stocks with excellent R&D capabilities.
• Communications, electronic warfare, and cybersecurity defense stocks provide ongoing revenue and have excellent growth rates.
• Defense stocks active in drone and anti-drone warfare rank among the fastest-growing defense companies.

The biggest downside is the change in government defense spending. It can have a material impact on defense stocks, but developments over the past three years have nearly eliminated this risk.

Here is a shortlist of currently attractive defense stocks:

• Lockheed Martin (LMT)
• Leidos Holdings (LDOS)
• Teledyne Technologies (TDY)
• Axon Enterprise (AXON)
• Northrop Grumman (NOC)
• Howmet Aerospace (HWM)
• AeroVironment (AVAV)
• Curtiss-Wright (CW)
• RTX (RTX)
• General Dynamics (GD)

Lockheed Martin (LMT) – A long position in LMT between $434.84 and $443.45

LMT rallied over 16% but has since given back some of those gains. I am holding my long positions as I see more upside potential for this defense behemoth.

Leidos Holdings (LDOS) – A long position in LDOS between $173.60 and $182.88

LDOS advanced by over 12% before a minor move into ascending support levels, from where it stabilized. I keep holding this defense stock, which has more upside potential.

Teledyne Technologies (TDY) is a defense and aerospace conglomerate that includes over 100 companies. It operates four divisions: Digital Imaging, Instrumentation, Engineered Systems, and Aerospace and Defense Electronics. TDY remains sanctioned by the Chinese government for arms sales to Taiwan. Teledyne Technologies is also a member of the S&P 500 index.

So, why am I bullish on Teledyne Technologies despite its 10%+ correction?

Teledyne Technologies reported solid third-quarter earnings, but investors were hoping for even better fourth-quarter guidance, which added to the healthy correction in TDY. I like Teledyne Technologies’ profit margins and diversification, which also serve semiconductor foundries, the health care sector, and the scientific industry. I am buying into the strength of its unmanned defense segment but equally appreciate the cost reductions and improvements in its industrial automation and machine vision operations.

Teledyne Technologies Fundamental Analysis Snapshot

The price-to-earning (P/E) ratio of 30.86 makes TDY a reasonably priced stock. By comparison, the P/E ratio for the S&P 500 is 30.28.

The average analyst price target for Teledyne Technologies is $622.18. This suggests good upside potential with reasonable downside risks.

Teledyne Technologies Price Chart

• The TDY D1 chart shows price action moving just below its ascending Fibonacci Retracement Fan.
• It also shows Teledyne Technologies inside a horizontal support zone.
• The Bull Bear Power Indicator turned bearish during the pre-earnings sell-off but suggests bearish exhaustion with early signs of an ascending trendline forming.

I am taking a long position in Teledyne Technologies between $519.23 and $535.51. Management cited solid performance in its defense sector, led by unmanned systems, counter-unmanned air systems, and infrared subsystems, and recovery in its short-cycle commercial segment.

Axon Enterprise (AXON) develops weapons and technology products for military, law enforcement, and civilians. Formerly known as TASER, AXON expanded into supplying drone technology, artificial intelligence, cloud-based services, digital management platforms, body-worn cameras, virtual reality training to law enforcement, and in-vehicle camera systems. AXON is also a component of the NASDAQ 100 and the S&P 500 indices.

So, why am I bullish on AXON following its breakout?

While valuations remain sky-high, I like the growth trajectory of its artificial intelligence and cloud-based services. The balance sheet is healthy, and its expanding product lines remain well-positioned to accelerate revenue growth to exceed 25% annually. I am bullish on its drone segment, including Drone as First Responder (DFR) solutions, robotic solutions to enhance indoor scouting and decision-making, and its drone defense developed on the advanced AI-Driven Autonomous C2 platform.

Axon Enterprise Fundamental Analysis Snapshot

The price-to-earning (P/E) ratio of 181.72 makes AXON an expensive stock. By comparison, the P/E ratio for the S&P 500 is 30.28.

The average analyst price target for AXON is $186.69. It suggests moderate upside potential from current levels.

Axon Enterprise Price Chart

• The AXON D1 chart shows price action breaking out above its ascending 38.2% Fibonacci Retracement Fan level with expanding bullish momentum.
• It also shows Axon Enterprise completing a breakout above a massive horizontal support zone.
• The Bull Bear Power Indicator is bullish with an ascending trendline.

I am taking a long position in AXON between $718.19 and $753.16. I am buying into the strength and growth prospects of its artificial intelligence and cloud-based solutions, which account for over 40% of revenues, and into its drone division.

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