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

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.

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.

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%.

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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 10^th 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.

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