Defense Spending Cut Fears Open A Window Of Opportunity: General Dynamics In Focus

2025-02-25 08:30:00 ET

Summary

• The article discusses reasons for the abysmal performance of defense stocks since the election of Donald Trump, while explaining why a window of opportunity is opening for long-term oriented investors.
• I take a brief look at L3Harris Technologies, RTX Corp., Lockheed Martin, Northrop Grumman, and Huntington Ingalls Industries and share where I plan to allocate more capital.
• I'll take an in-depth look at the fundamentals of General Dynamics, a surprisingly well-diversified and financially sound hybrid commercial aviation and defense company.
• In addition to discussing growth prospects, balance sheet quality, and profitability, I'll give my opinion on the current valuation of GD stock and explain why I opened a starter position.

Introduction: Why The Market Is Wrong Selling Defense Stocks Now

While defense stocks soared in an initial reaction to the election of Donald Trump as the 47th President of the United States, their performance since then has been pretty abysmal (Figure 1). Defense giant Lockheed Martin Corp. ( LMT ), best known for the F-35 fighter jet platform, and L3Harris Technologies, Inc. ( LHX ), which is currently best known for its bold acquisition of rocket engine maker Aerojet Rocketdyne, are down about 20% since November 2024. Northrop Grumman Corp. ( NOC ), the company behind the B-21 Raider bomber and the Ground Based Strategic Deterrent ((GBSD)), and military shipbuilder Huntington Ingalls Industries, Inc. ( HII ) are down more than 10%.

RTX Corp. ( RTX ) is actually up slightly since November, even though the company manufactures the F-35's engine and the missiles for the Iron Dome system . Intuition suggests that this outperformance is due to the company's significant diversification into commercial aviation. Another reason for RTX's outperformance could be President Trump's executive order to build the Iron Dome defense shield for America. At the same time, General Dynamics Corp. ( GD ) has been one of the worst performing companies in the sector since November 2024, despite its significant exposure to commercial aviation with its Gulfstream franchise of business jets.

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