Rising global geopolitical turmoil in the Middle East and Eastern Europe and rising tensions in Southeast Asia create the perfect conditions for defense stocks to soar. The companies behind these stocks often see an uptick in orders for equipment and services.
Despite the perfect conditions for defense stocks to thrive in 2024, the S&P Aerospace & Defense Select Industry Index has underperformed the market. Year to date, it is up 7.71%, compared to the 16.07% gain of the S&P 500 Index in the same period.
A major reason major defense indices have underperformed in 2024 is Boeing’s (BA) recent poor performance. Besides that, the US is headed into an election in November 2024, which could see major policy changes in the future.
While Congress approved $95 billion in spending for its allies, including $61 billion for Ukraine, that might not be possible in 2025. As such, with funding scarce in 2025, these three defense stocks might not sustain their momentum.
These three defense stocks might be risky to hold based on various factors, which will be explained below.
RTX (RTX)
RTX (NYSE:RTX) has seen an uptick in interest since hostilities in the Middle East escalated. Formerly called Raytheon Technologies, it maintains three business units through its subsidiaries: Raytheon, Pratt &Whitney and Aerospace.
The company is heavily involved in the supply of radars, sensors, torpedos, microwave systems, command and control systems and space-based systems. Diversifying into commercial operations means it can source some revenue outside the defense sector.
Since the start of the year, RTX stock has grown by 20.64%. Consequently, analysts believe it is overvalued. They forecast an average price target of $102.11, a 1.67% downside based on the last closing price of $102.81. The most pessimistic analysts forecast a price of $73.00, a 29.70% downside.
RTX has shed 2.15% of its value in the past month, which could signal the beginning of a downward trend. When coupled with pessimistic projects from analysts, RTX might be one of the defense stocks you should drop by 2025.
Leonardo DRS (DRS)
Leonardo DRS (NASDAQ:DRS) Leonardo DRS has been a major supplier to the US military. For instance, it recently announced a new milestone in supplying its equipment to the US Army helicopter missile warning system.
It also announced in May 2024 that it had won a major KC-46 Pegasus Tanker Fleet contract. However, the most significant defense contract to date was a $3 billion contract for the U.S. Navy’s Columbia-Class Submarine Program.
Like RTX, Leonardo DRS faces a similar political challenge. With Republicans opposed to the war in Ukraine and Trump’s vow to end the conflict, it could place Leonardo DRS in a tough spot.
Additionally, the US Navy has been known to cancel major contracts with short notice. Two recent examples are the cancellation of the Zumwalt class destroyer program and the Seawolf submarine program.
Due to recent major defense contracts, DRS stock is up 40.92% year to date. However, if the Navy decides to institute cost-cutting measures, the Columbia-Class submarine program could be amongst those cut first.
Stock analysts are also pessimistic about the future of DRS stock. They forecast an average price target of $25.14, a 9.70% downside, based on the last closing price of $27.79. Meanwhile, the most pessimistic analysts forecast is that DRS will slide 38.94% to $17.00.
Based on the analysts’ pessimistic outlook and risky political climate for the stock’s future, DRS should be one of the defense stocks you drop by 2025.
Boeing (BA)
Boeing (NYSE:BA) is one of the world’s biggest aerospace and defense companies. It is also a major supplier of commercial planes, satellites, fixed-wing and rotary crafts and laser weapons.
However, the company has recently been in the news for all the wrong reasons. First was the Alaska Airlines Boeing 737-MAX-9 incident, in which an emergency door was blown off. Several passengers were injured, but they were later medically cleared.
The incident caused an uproar, with Alaska Airlines grounding all 737-MAX-9 planes pending an investigation into the issue.
Soon after, the US Federal Aviation Administration began a safety investigation into the company. On its website, the federal agency stated that it had stopped all production of Beoing 737 MAX. Additionally, the FAA is looking into Boeing’s 787 Dreamliner production quality after it emerged that Boeing employees may have falsified safety records.
Amidst negative publicity, Boeing stock has plummeted 28.63% since the start of 2024. With added political intrigues in November that could see a slowdown in US defense spending, its future looks bleak.
Analysts are not confident about Beoing’s future, giving it a solid sell rating. They forecast an average price target of $2322, a 23.18% upside. The most optimistic analysts forecast a 270.00,
49.81% upside, while the most pessimistic analysts expect $140.00, 22.32% downside.
The halt in production by the Federal Aviation Administration and the pending outcome of legal problems could lead to a huge financial hit for the company. Consequently, it should be amongst the top defense stocks you drop before the end of the year.
On the date of publication, Joel Lim did not have (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.