3 Defense Stocks Gaining From Budget and Interest Rate Pressures

Key Points

• As the national debt grows to a staggering $36 trillion today, its interest burden has surpassed the defense budget, and a potential increase is called for.
• A larger defense budget could quickly trickle down to these three stocks in the form of new government contracts.
• The current price discounts and Wall Street analyst upside would give them potential buy opportunities today.

People tend to ignore their government’s finances because they seem more complicated than personal finances, yet they are exactly the same. They are nothing more than ledgers of income, expenses, debts, and assets. Once this fact is accepted, investors can then make their investment decisions based on where these accounts are and how they affect the broader market and industries. On that note, today’s issue comes from the entire national debt.

The issue is not the $36 trillion in debt but the amount of interest generated from this debt level, which has now mounted to a high of $1.1 trillion. The issue with this interest expense is that it has now surpassed the national defense budget, and that’s like saying someone’s credit card interest expense is larger than their home insurance payments.

It's not a great situation to be in, and the last time it happened in the 1990s, an inevitable expansion resulted. This is why defense and aerospace stocks come into play, names like Lockheed Martin Co. NYSE: LMT, Northrop Grumman Co. NYSE: NOC, and even Boeing Co. NYSE: BA. These all share the same tailwinds but can offer investors a different upside make up for the coming months as well.

Lockheed Martin Stock’s Pullback: A Low-Risk Opportunity

After the stock had a very favorable rally on the back of rising geopolitical tensions over the past two quarters, it seems like the conflict premium has subsided. Now, Lockheed Martin stock has fallen to only 73% of its 52-week high price. While this may turn some momentum investors—and traders—away, others will see it as an opportunity.

For example, those from Geode Capital Management decided to boost their holdings in Lockheed Martin stock by 1.8% as of November 2024, bringing their position to a high of $2.8 billion today, or 2% ownership in the company. New institutional buying could be a sign of a potentially attractive setup in the stock today, and it doesn’t end there.

Wall Street analysts still see a consensus price target of $591.2 for Lockheed Martin stock, calling for up to 26.2% upside from where it trades today. This is important for investors to remember since analysts don’t often risk their careers and reputations by boosting a stock that has recently pulled back, so a thesis must be alive today.

That thesis might come from the potentially larger defense budget, which will have to be distributed amongst the nation’s leading defense companies, a market which is 13.5% owned by Lockheed Martin and only tracked closely by Boeing’s 13.9%.

Insiders Like Northrop Grumman Stock’s Discount

A story that rhymes with Lockheed Martin’s price action, Northrop Grumman stock was the darling of defense names two quarters ago but has now fallen to only 76% of its 52-week high. Considering that the name is now in bear market territory, not many analysts—or buyers—should be excited about the company’s prospects.

However, those who understand the implications for the defense budget today and its potential increase tomorrow will understand that this stock’s future has a lot of inherent upside. Those from Wells Fargo know this and weren’t afraid to make their optimistic views public.

As of January 2025, these analysts see the stock as an overweight rating, this time bringing along a $ 595-a-share valuation. To prove these new targets right, Northrop Grumman stock will have to stage a rally of up to 28.5% from where it trades today, another double-digit upside opportunity for investors to consider in the industry.

These analysts weren’t the only ones looking into the stock’s higher ceiling, though. Management recently boosted the company’s stock buyback program to $4.2 billion, roughly 6% of its market capitalization. Such an aggressive buyback program would mean that insiders believe the stock to be cheap enough to buy today, something investors should consider.

Boeing’s Turnaround Play: What Investors Are Banking On

Wall Street analysts boldly projected Boeing’s earnings per share (EPS) in the coming 12 months. Going from today’s net loss of $10.44 a share, these analysts think the company can get to a level of only $0.42 net loss per share in 12 months. A bold prediction, but not one that is far from the realities presented today.

Boeing is exposed to the defense budget increase and the bullish tailwinds in the broader transportation sector. There are several reasons analysts decided to boost some airline stocks recently. More than that, China has decided to make Boeing its main supplier of commercial airplanes in the coming years.

As some of the best value investors see China as a beast waiting to wake up, Boeing projects high growth for that country’s travel industry, and they will be right there to cater to it. This is why analysts from Deutsche Bank decided to keep their buy rating as of January 2025 and boost their valuations to $215 a share for 25% upside in the stock.

This massive turnaround in EPS has also gotten those from State Street to buy an additional 2.3% of Boeing shares for a net $4.2 billion position today, or 4.5% ownership in the company.