The wave of defense concept stocks: Analyzing the investment value of the military industry from the perspective of geopolitical situations

The current global situation is turbulent, with the Ukraine-Russia conflict and ongoing turmoil in the Middle East. Countries are increasing their military preparedness in an irreversible trend. Unlike traditional manpower-consuming wars, modern military conflicts emphasize technological empowerment—demanding new combat capabilities such as drone swarms, precision missile systems, and information warfare. This shift drives steady growth in global military spending and opens new investment opportunities for defense concept stocks.

Core Logic of Defense Concept Stocks

Broadly speaking, defense concept stocks refer to listed companies that supply products and services directly or indirectly to government defense departments. From large weapon systems to military components and basic logistics supplies, the entire industry chain is large and complex.

Current changes in the geopolitical landscape profoundly influence military expenditure allocation. In the context of a declining birthrate, countries tend to replace manpower with technology—using unmanned reconnaissance drones instead of reconnaissance units, and precision-guided missiles instead of saturation bombing. This transition means defense budgets are shifting from traditional ground forces to aerospace and information domains, directly boosting the growth potential of related defense concept stocks.

Key Considerations for Investing in Defense Concept Stocks

Before analyzing individual stocks, investors must clarify three core issues:

The proportion of military industry business determines growth potential

Many companies are involved in military-civilian integration, with significant variation in military revenue contribution. If a company’s military orders account for less than 20%, its stock performance is more driven by civilian business, making it difficult to fully benefit from the growth of defense budgets.

Future demand directions determine long-term prospects

Over the past five years, the growth rate of military expenditure for the Air Force and Navy has significantly exceeded that of the Army, indicating that suppliers in aerospace, maritime, space, and missile sectors have higher growth potential. Conversely, traditional ground weapon manufacturers may see slower order growth.

Risks in civilian business affect stock stability

Among leading defense companies, some have substantial civilian business segments. These companies face dual risks—while military demand remains stable, fluctuations in the civilian market could drag down overall performance, and product defects or lawsuits could cause sharp stock declines.

Leading U.S. Defense Concept Stocks

Lockheed Martin(LMT): Pure military heritage

Lockheed Martin is the world’s largest defense contractor, with over 90% of its revenue from military business, covering missiles, aerospace, and space sectors. The company benefits long-term from U.S. defense strategy upgrades, with steady stock growth. From a long-term allocation perspective, it is a typical representative of defense concept stocks.

Raytheon Technologies(RTX): Growth with hidden risks

Raytheon is also one of the top five U.S. arms suppliers, maintaining stable growth in military orders. However, recent years have seen challenges—defects in powder metal parts supplied to Airbus A320neo aircraft, which can cause engine fractures under high-pressure conditions. Litigation and maintenance costs related to these issues are substantial; it is estimated that 350 aircraft will need inspections annually over the next 3-4 years, with repair cycles lasting up to 300 days. While its military segment performs steadily, difficulties in the civilian aviation sector have weighed on its overall stock price. Investors should closely monitor the company’s problem-solving progress before investing.

Northrop Grumman(NOC): A long-term choice with a deep moat

Northrop Grumman is the fourth-largest global defense manufacturer and the largest radar producer, with nearly 100% of its revenue from military business. The company leads in strategic deterrence fields (space, missiles, communications). Notably, Northrop has increased its cash dividends for 18 consecutive years, reflecting stable profitability and management’s confidence in long-term prospects. This year, it accelerated a $5 billion share repurchase plan to further protect shareholder interests. As global defense readiness continues to rise, Northrop’s orders and profits have a solid foundation.

General Dynamics(GD): A defensive choice with stable cash flow

General Dynamics is among the top five U.S. defense suppliers, with important supply relationships across land, sea, and air forces. Although military revenue accounts for about 75%, its civilian division mainly involves high-end private jets (like Gulfstream). This customer base is resilient to economic fluctuations. Historical data shows that during the 2008 financial crisis and the COVID-19 pandemic in 2020, the company’s profits remained relatively stable. Its 32-year streak of dividend increases makes it a “dividend aristocrat.” While revenue growth is not rapid, cost control and business stability have enabled the company to generate reliable long-term returns for shareholders.

Boeing(BA): Military opportunities amid civilian difficulties

Boeing has a dual identity—both civilian and military. It holds the world’s largest market share in commercial aircraft. However, the 737 MAX grounding and the COVID-19 pandemic have dealt heavy blows to its civilian business. More troubling is the rapid rise of China’s commercial aircraft industry, supported by policies, which could erode Boeing’s long-standing market dominance. From a defense perspective, Boeing’s B-52 bombers, Apache helicopters, and other products have relatively stable orders, but cannot offset the decline in its civilian sector. Therefore, Boeing is more suitable for a “bottoming out rather than chasing rallies” strategy.

Caterpillar(CAT): Marginal defense concept stock

Caterpillar is often labeled as a “defense concept stock,” but in reality, military revenue accounts for less than 30%, with core business still in construction machinery. The company benefits from global infrastructure investments and commodity demand. It is more a barometer of economic cycles than a direct defense beneficiary. Post-war or disaster-related urban reconstruction can boost equipment demand, but this is a marginal factor.

Investment Opportunities in Taiwan Defense Concept Stocks

The escalation of cross-strait tensions has directly increased local defense budgets. Over the past two years, both Taiwan and China have increased their defense spending, leading to a batch of domestic defense concept stocks.

Thunder Tiger(8033.TW): From toy to military industry transformation

Thunder Tiger was originally a remote-controlled aircraft toy manufacturer. With the surge in military drone applications, the company successfully transitioned into a defense supplier. In 2022, its stock price surged significantly. As demand for military drones increases, its future prospects are promising.

Hanxiang(2634.TW): A stable choice for military-civilian integration

Hanxiang’s business covers both military and civilian sectors, mainly training aircraft for military use and aircraft maintenance and parts sales for civilian markets. Compared to companies with single business risks, Hanxiang’s diversified layout offers stronger risk resistance. As long as the aviation industry remains healthy, there will be steady demand for maintenance and repair services, with relatively balanced order growth. Its stock performance is thus more stable than companies like Raytheon or Boeing, which face issues in their core businesses.

Defense Concept Stock Investment Framework

Borrowing from investment master Warren Buffett’s principles, high-quality investment targets should meet three conditions: a sufficiently long runway, a deep moat, and a “wet snowball” (strong compounding). Defense concept stocks happen to possess all three.

Eternal long-distance track

Human civilization’s history is a history of conflict. Military demand has never ceased from ancient times to today, and this will continue in the future. This guarantees that the entire industry’s “race track is long enough.”

Technological leadership with high moat

Defense companies often lead civilian sectors by 5 to 10 years in advanced technology. The most cutting-edge R&D results are found in military laboratories and battlefield applications, often outdated in civilian use. More importantly, procurement decisions involving national defense security require long-term trust-building; new entrants face extremely high barriers. Once a company establishes a supply relationship with the government, it is difficult to be replaced. Many core technologies are included in national patent sharing or exclusive supply agreements, further strengthening the moat of leading firms.

Geopolitical dividends as growth drivers

Currently, the world is gradually shifting from economic globalization back to regional politics. During Trump’s administration, the “manufacturing return to the U.S.” rhetoric re-emerged. Multilateral cooperation frameworks have weakened, and military preparedness among nations has escalated. It is expected that global military expenditure will continue to grow for a considerable period. The main trigger for sharp declines in defense stocks is “arms reduction,” but under current geopolitical tensions, this risk is very low. Therefore, growth prospects are as “wet snow” as snow.

Investment Risk Warnings

The core appeal of defense concept stocks lies in their “pure military industry” component. Before investing, it is essential to thoroughly research the company’s military-to-civilian revenue ratio, civilian business risks, legal liabilities, and other hidden dangers. Often, increased military orders do not necessarily push up stock prices, because negative factors in civilian markets can be more burdensome—this is a lesson from Raytheon and Boeing.

Additionally, the customer base (government and military) determines that these companies are less likely to go bankrupt, but this “trust dividend” does not guarantee stock price increases. Investors must also consider the company’s financial health, industry competition, and changes in the civilian market.

Summary

As a long-term investment, defense concept stocks have unique advantages, but careful selection is crucial. Investors should focus on companies with high military revenue contribution, deep technological moats, and stable civilian businesses, while closely monitoring global geopolitical developments and defense budgets. Starting to allocate to defense concept stocks now can be done through the Mitrade platform, trading U.S. and Taiwan stocks in real-time to seize the long-term opportunities brought by the ongoing military technology transition.

Overall, defense concept stocks represent one of the most certain investment tracks today, but rational selection and risk management are equally important.