Four Under-the-Radar Defense Investments for Income Lovers to Buy as Threats Mount

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Four under-the-radar defense investments for income lovers to buy could be on the verge of rebounding as threats from China, Russia, North Korea and Iran grow.

The four under-the-radar defense investments to buy may build appeal in the weeks and months ahead as China, Russia, North Korea and Iran gain international notoriety for their aggressive actions and statements that are raising concerns in neighboring countries. Those four under-the-radar defense investments to buy provide integral components or products to position peaceful nations to deter hawkish leaders in China, Russia, North Korea and Iran who otherwise may view a lack of new counter measures as a sign of weakness to exploit.

Naysayers about the rising risk need not to look any further than July 2021 when the Chinese Communist Party (CCP) aired a video in Mandarin that warned Japan of a nuclear response and “full-scale war” if the island nation interferes with the world’s most populous country’s plans to annex Taiwan. The video, aired on a channel that is approved by the CCP, named Japan as the one exception to China’s stated policy to not use nuclear weapons against non-nuclear powers.

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China’s Nuclear Threats Against Japan May Aid Four Under-the-Radar Defense Investments for Income Lovers to Buy

“We will use nuclear bombs first,” according to the video. “We will use nuclear bombs continuously. We will do this until Japan declares unconditional surrender for the second time.”

The video later was deleted from the Chinese platform, Xigua, after gaining 2 million views, but copies were uploaded to YouTube and Twitter. China’s threats of a nuclear attack came two weeks after Japan’s Deputy Prime Minister Taro Aso said his country must “defend Taiwan,” The Japan Times reported.

One contender to become Japan’s next prime minister voiced support for acquiring nuclear-powered, not nuclear-armed, submarines just weeks before the country’s Oct. 31 election. When questioned with other candidates in a televised forum, Kono Taro said nuclear-powered submarines would be a “very important” capability for Japan. However, he lost the election to become the country’s next prime minister to Fumio Kishida, of the Liberal Democrats.

Australia’s Prime Minister Scott Morrison announced in October that at least eight nuclear-propelled submarines using American or British technology will be built Down Under to start protecting the country in the late 2030s. The announcement follows increasing rhetoric from China that warns Australia not to try to thwart China’s territorial claim on Taiwan.

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France had been seeking a $60 billion deal to provide nuclear-powered submarines to Australia and responded to its loss by withdrawing its ambassador to Washington and by the French foreign minister calling the deal a “stab in the back.” However, France did not question Australia’s interest in preparing to defend itself from China. France’s leaders instead said they wanted the contract to create jobs and revenues in its country.

Four Under-the-Radar Defense Investments for Income Lovers to Buy as Russia Flexes Military Muscle

As for Russia, the country recently has been staging military forces along its border with the Ukraine. Although it is possible no political decision to launch a military operation has been made, the recent activity of Russian soldiers goes well beyond normal training.

For example, Russian units from thousands of miles away in the Caucasus have been sent to the border. Those forces could help Russia carry out a new attack against the Ukraine, as it did in 2014 when troops under its direction invaded and annexed the Crimean Peninsula. Those Russian-guided forces also backed a separatist rebellion in Ukraine’s eastern region.

Plus, many Russian military units seem to be moving at night, possibly to avoid scrutiny, unlike previous buildups in March and April. Vladimir Putin’s legacy as Russia’s leader will include him supporting armed gunmen from his country infiltrating Ukraine in 2014 to seize land militarily, as well as reportedly using a surface-to-air missile to shoot down a civilian commercial aircraft that led to the deaths of 298 passengers and crew.

North Korea and Iran Actions May Lift Four Under-the-Radar Defense Investments for Income Lovers to Buy

North Korea fired its hypersonic missile into the sea during a test in September. Although the new weapon is intended to help boost the country’s military capability, it is in the early stages of development and not close to ready for combat, according to South Korea’s Joint Chief of Staff.

Also in September, North Korea tested a train-based ballistic missile and a new long-range cruise missile. Kim Jung-un, the country’s leader, has vowed to keep expanding the nation’s nuclear arsenal.

As for Iran, its Parliament passed a new law in December 2020 requiring acceleration of its nuclear program. The law led to a “serious escalation” in Iran’s violations of a 2015 nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), according to the United States Institute of Peace.

The law mandates the Atomic Energy Organization of Iran to ramp up uranium enrichment, posing a greater proliferation risk than Iran’s previous breaches of the pact, the institute reported. The law further requires relief from certain sanctions against it by other nations before the accelerated nuclear program could be halted.

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Four Under-the-Radar Defense Investments for Income Lovers to Buy Include a Fund

America’s defense budget will increase despite the country’s withdrawal from Afghanistan as U.S. policy shifts toward “containing” China and Russia, among others, said Bob Carlson, who leads the Retirement Watch newsletter. Defense stocks currently sell at “solid valuation discounts” to the S&P 500, despite having higher estimated earnings growth than the S&P 500, he added.

Retirement Watch chief Bob Carlson talks with columnist Paul Dykewicz.

Carlson, who also serves as chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets, said that his favorite defense industry fund to recommend is SPDR S&P Aerospace and Defense (XAR). The fund focuses on small- to mid-size companies and its top holdings and investment weightings recently were Heico (NYSE: HEI), 4.88%; Spirit AeroSystems (NYSE: SPR), 4.57%; Textron (NYSE: TXT), 4.55%; Hexcel (NYSE: HXL), 4.43%; and TransDigm Group Inc. (NYSE: TGD), 4.40%.

The dividend-paying exchange-traded fund (ETF) recently held 32 positions and had 44% of its holdings in the 10 largest positions. It is up 5.11% so far this year and 9.18% during the past 12 months.

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Nuclear-Powered Submarine Contractor Heads Four Under-the-Radar Defense Investments for Income Lovers to Buy

BWX Technologies Inc. (NYSE: BWXT), of Lynchburg, Virginia, provides critical components and services to the U.S. Department of Defense (DoD), other government agencies and commercial customers. The company’s clients include the Naval Nuclear Propulsion program that supports submarines that allied governments such as Australia recently chose to add to enhance their national defense.

In addition, BWX Technologies provides a range of nuclear components and services, not only for submarines but for aircraft carriers and other nuclear and non-nuclear research and development (R&D). The company has been manufacturing naval nuclear components and reactors since the 1950s, when it designed and fabricated components for the U.S. Nautilus, the world’s first nuclear-powered submarine.

Since then, U.S. government submarines safely have traversed millions of miles using components built at BWXT facilities. Its reactors power the Navy’s Ohio, Virginia, Seawolf and Los Angeles-class submarines, as well as the Nimitz, commissioned in 1975, and Ford-class aircraft carriers. The $13 billion USS Gerald R. Ford is not only the U.S. Navy’s newest and largest aircraft carrier but the biggest in the world. The ship, commissioned in July 2017, is the first of the Ford-class carriers, which are more technologically advanced than those in the Nimitz class. Construction of the ship began in 2005 but its expected deployment has been delayed until 2022, four years later than its original maiden deployment date of 2018, due most recently to development, installation and delivery problems by a subcontractor for the USS Gerald R. Ford’s 11th and final advanced weapons elevator.

For comparison, the 10th and final iteration of the Nimitz class is the USS George H.W. Bush, CV-77, commissioned in 2009. It cost roughly $6.2 billion, whereas the USS Gerald R. Ford-class vessels cost nearly double that amount at roughly $13 billion, with research and development expenses adding $4.7 billion. The Ford-class carriers will consist of 10 ships to replace the Navy’s current Nimitz-class carriers on a one-for-one basis. Among its many advantages, the Ford-class ships will be able to mount laser self-defense weapons.

BofA Recommends BWX Technologies Among Four Under-the-Radar Defense Investments to Buy

BofA Global Research gives BWXT a buy rating and a price objective of $67. The weighted average enterprise value (EV) / earnings before interest, taxes, depreciation and amortization (EBITDA) multiple on the defense industry prime contractors in BofA’s coverage universe is 13.5x 2022 earnings estimates. BWXT historically trades on average at a 1.1x premium to the prime contractors’ earnings multiple due to its pact with the U.S. Navy, its monopoly on nuclear-powered ships and its diversification effort, according to a BofA.

Key risks to BWX Technologies falling short of that price objective would be a potential loss of U.S. government contracts, as well as changes in contracting terms that could pressure margins and program procurement changes that result in market share loss. The U.S. government is BWXT’s largest customer, accounting for about 90% of the company’s revenues.

The potential to exceed the price target would stem from acquisitions, better-than-expected operating performance and margins, increased demand in the nuclear aftermarket for power plants and higher-than-forecast share in missile tubes for the Virginia-class submarines and Ohio-class submarines, BofA added.

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Crane Gains Spot Among Four Under-the-Radar Defense Investments for Income Lovers to Buy

Crane Co. (NYSE: CR), of Stamford, Connecticut, designs and manufactures highly engineered industrial products that feature proprietary and differentiated technology. Its customers are engaged in aerospace and defense, bill validation and counterfeit detection, oil and gas, chemical, pharmaceutical and transportation, among other niches.

BofA placed a buy rating and a $132 price objective on the stock to offer new investors roughly 30% upside potential. Risks to the BofA price objective are a new downturn in commercial aviation and the natural cyclicality of the business. The company also could be materially affected by increased research and development expenses if serious complications arise from new platforms.

Other risks include weakness in chemicals, oil and gas, and power, which could materially affect the outlook for Crane’s Process Flow Technologies unit. Increasing asbestos claims could result in higher settlement or defense costs, thereby affecting CR’s financial results.

Outperformance could include a faster recovery in the company’s end-markets than expected, particularly in commercial aerospace. Plus, acquisitions could provide lift to BofA’s estimates, while better-than-expected execution could boost the company’s earnings power.

Chart courtesy of www.stockcharts.com

Spirit AeroSystems Snags Spot With Four Under-the-Radar Defense Investments for Income Lovers to Buy

Spirit AeroSystems Holdings, Inc. (NASDAQ: SPR), of Wichita, Kansas, manufactures aero-structures for commercial airplanes, defense platforms and business and regional jets. It provides aluminum and advanced composite manufacturing, and its core products include fuselages, integrated wings and wing components.

BofA put a buy rating and a $60 price target on Spirit AeroSystems Holdings, contingent on the worldwide recovery of normal air traffic volumes. Further risks included the company’s heavy dependence on the Boeing Co. (NYSE: BA) for about 80% of sales. For example, a material change in the industry’s cycle or Boeing’s prospects could negatively impact Spirit.

The Kansas company is involved with several aircraft development programs that could suffer from cost overruns or other development-related risks. Plus, most of Spirit’s sales come from original equipment manufacturers (OEM), and limited aftermarket revenues could become a problem if the civil aircraft cycle turns dramatically, according to BofA.

In addition, higher oil prices would likely derail air traffic growth and aircraft demand, resulting in a downturn in commercial aviation, BofA cautioned. Given that aircraft are priced in dollars, an unexpected rapid appreciation in the U.S. currency could significantly impact order activity. There also could be forward losses related to the Airbus A350 or Boeing 787 programs if ongoing pricing negotiations are unfavorable.

Chart courtesy of www.stockcharts.com

Embraer Offers Alternative to Four Under-the-Radar Defense Investments for Income Lovers to Buy

Non-dividend-paying Embraer (NASDAQ: ERJ), of São Paulo, Brazil, is the world’s third-largest manufacturer of commercial jets, as well as involved broadly in commercial and executive aviation, defense and security. Embraer’s military aircraft include the A-29 Super Tucano light attack and advanced trainer, as well as the multi-mission C-390 millennium military airlift.

The company also provides a full line of integrated applications such as command and control center (C4I), radars, space and Intelligence, Surveillance and Reconnaissance (ISR). Embraer received a buy rating and a $30 price objective from BofA, based on the investment firm’s sum of its parts analysis.

The varied businesses of Embraer require BofA to blend its valuation of the company. For example, Embraer’s Commercial Aviation business is valued at an earnings multiple that is double that of its Defense & Security business.

The stock could outperform the BofA price target if air traffic recovers stronger than anticipated, a joint venture is arranged to help its commercial aviation unit, cost cutting and execution go better than forecast, sales campaigns beat projections for light and medium business jets and Brazilian defense and security budgets rise.

Chart courtesy of www.stockcharts.com

Factors that could prevent the stock from attaining the BofA price objective include if the COVID-19 pandemic results in a larger-than-expected downturn in commercial aviation and the company’s exposure to currency headwinds due to the denomination of its costs in Brazilian reals. Other key risks include a Brazilian market selloff impacting ERJ shares and any inability to list or otherwise realize the value of its EVE unit. The latter business offers a global Urban Air Mobility (UAM) ecosystem that includes advanced electric vertical aircraft (EVA), coupled with a global services and support network and a unique air traffic management solution.

Non-Dividend-paying Teledyne Omitted from Four Under-the-Radar Defense Investments for Income Lovers to Buy

Teledyne Technologies Inc. (NASDAQ: TDY), of Thousand Oaks, California, does not pay a dividend but is involved in aerospace and defense, along with diverse activities in factory automation air and water quality environmental monitoring, electronics design and development, oceanographic research, oil and gas exploration and production, medical imaging and pharmaceutical research. Its products include digital imaging sensors, cameras and systems within the visible, infrared and X-ray spectra, monitoring and control instrumentation for marine and environmental uses, harsh environment interconnects, aircraft information management systems, defense electronics and satellite communication subsystems.

BofA put a buy recommendation on Teledyne and a price objective of $598. The stock could beat the estimate with faster integration of its FLIR acquisition, a more rapid top and bottom-line recovery in the industrials businesses and even further operating leverage, BofA wrote. Downside risks include poor integration of FLIR, an industrials downturn, a significant decline in the DoD’s budget and an exogenous event that prevents international sales.

Chart courtesy of www.stockcharts.com

COVID-19 Risk Rises as Cases and Deaths Jump in Europe and the United States

The highly transmissible Delta variant of COVID-19 once again is causing a rise in new cases and deaths in the United States, Europe and other regions of the world. Public health experts and high-level government leaders still are urging increased vaccinations and booster shots, as well as consistent mask wearing, as needed.

European stocks have been slipping lately as government leaders in several countries are proposing new measures to curb COVID-19’s latest surge. Slovakia declared a 90-day state of emergency and a two-week lockdown on Nov. 24 after a spike in COVID-19 cases. The country is in the midst of the world’s fastest rise in infections, triggering new restrictions that include closing all non-essential stores, along with bars and restaurants, to ease the crushing case load on its struggling health care system.

“Slovakia is losing the battle against COVID,” its President Zuzana Čaputová told the nation in a televised speech on Nov. 23.

Austria extended its lockdown on Nov. 19 to its entire population as it became the first European Union nation to adopt a policy of mandatory vaccinations, effective Feb. 1. Germany shares a border with the Alpine nation and it is considering mandating COVID-19 vaccines, too. Italy also is weighing whether to enact new rules for unvaccinated people.

Four Under-the-Radar Defense Investments for Income Lovers to Buy Deflect Worst Damage from COVID

The Centers for Disease Control and Prevention (CDC) specifically has blamed the Delta variant for causing a surge in recent cases and deaths. But the variant is leading to a rise in the number of people vaccinated from COVID-19.

As of Nov. 24, 231,367,686 people, or 69.7% of the U.S. population, have received at least one dose of a COVID-19 vaccine, the CDC reported. The number of fully vaccinated people has reached 196,168,756, or 59.1%, of the U.S. population, according to the CDC.

COVID-19 deaths worldwide, as of Nov. 24, topped the 5 million mark, soaring to 5,173,611, according to Johns Hopkins University. Worldwide COVID-19 cases have zoomed past 250 million, climbing to 259,363,018 on that date.

U.S. COVID-19 cases, as of Nov.24, soared to 48,090,875 and caused 775,369 deaths. America has the dubious distinction as the country with the most COVID-19 cases and deaths.

The four under-the-radar defense investments for income lovers to buy have the potential to rise significantly if the leaders of China, Russia, North Korea and Iran intensify their threatening actions and words against other countries in the weeks and months ahead.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for multiple-book pricing.

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