More of the world’s nations are going into rising conflict. This is why stocks in the defense sector are catching more of the market’s attention, and where Wall Street goes, money tends to follow.
Tensions between the United States and China, and even the Red Sea today, serve as a potential for new government contracts. This ends up helping some of the following stocks to dominate the industry.
To make sure you align your selection to the best possible stocks in the sector, you will have to keep two qualities in mind: Earnings growth and price targets set by Wall Street analysts.
The market tends to value highly those stocks who promise above-average growth rates. It is essential for you to thoroughly understand these two factors. As they say on Wall Street, “Don’t fight the market.
Boeing (BA)
After getting past a controversial incident involving a flight with Alaska Air Group (NYSE:ALK), 737 MAX jet manufacturer Boeing (NYSE:BA) saw its stock price decline by as much as 20%. However, things aren’t as bad as they seem today; here’s why.
The incident involved a 737 MAX 9 jet, which is a less significant revenue source for Boeing. That is also the product line that represented 0% of new orders in the past quarter. According to the company’s investor relations website, all new orders to be delivered this year and recognized as revenue/earnings are all made up of MAX 8 and MAX 10 jets. No order was affected by the MAX 9 incident.
That means that whatever negative effect the market was pricing into the stock (after the accident) will likely not be as bad as they thought. After all, 100% of the orders fall outside this event. This is why analysts project an EPS growth rate of up to 197% in the next 12 months.
This could be why the market is willing to pay an elevated price-to-earnings ratio of 76.7 times. Remember the saying, “It must be expensive for a reason.” It applies to the company today.
Spirit AeroSystems Holdings (SPR)
This stock is directly connected to Boeing. As its leading supplier–the largest supplier for the industry–the following name is a perfect way to play the lateral trends in the industry. Queue in Spirit AeroSystems Holdings (NYSE:SPR).
You now know that Boeing’s orders are secured. Which is why production needs to be happening now to deliver these to customers promptly. For this exact reason, supplier Spirit AeroSystems will likely not see any issues with booking revenue and earnings.
This comes as good news for Spirit Aerosystems. All is well despite negative media headlines.
Following in the same dynamic as Boeing, analysts have released their EPS projections for the next 12 months. It sits at a massive 320%!
Markets are now pricing the stock at a significantly high 60.3 times P/E ratio. This tells you that they see no issue with these projections today.
The market likes this situation, and so do analysts. Don’t fight either of them especially during a time when all of Spirit’s customers could imminently see a boom in their new orders. This does apply to both commercial and defense contracts.
Kratos Defense (KTOS)
Working on the next frontier of aerospace and defense is Kratos Defense (NASDAQ:KTOS). This may be one of the best stocks to consider in industry domination. Because it manufactures drone and unmanned aircraft units alongside artificial intelligence and surveillance capabilities, this stock could be an attractive proposition on its own and a potential takeover target.
The world of global defense and military has changed. Prior, the reality was that the country with the bigger army that won war. Today, it is about the guy with the latest technology. Knowing this, analysts realize that Kratos could be first in line to dominate the next generation of defense and aerospace equipment.
At its $2.7 billion market capitalization, the value proposition found in the company’s products and technology solutions could be a worthy addition for some of the bigger players’ portfolios. However, a takeover bid deals in hypotheticals. Here are some more concrete figures.
Analysts see EPS growing by as much as 48.2% in the next 12 months. Being above the industry-average expected growth of 18.4%. Not only that, but their price targets of $21.3 a share also reflect a net upside of 14.8% from today’s prices.
As of this writing, Gabriel Osorio-Mazzilli did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines