Are military industry concept stocks worth investing in? A review of 6 stocks to watch

Why Should You Pay Attention to Military Industry Concept Stocks Now?

Global geopolitical tensions are intensifying, and military spending has become a key item in national budgets. Whether it’s the Ukraine-Russia conflict or the Middle East situation, a phenomenon is reflected: modern warfare relies more on high technology than manpower accumulation. Investments in new weapon systems such as drones, precision missiles, and information warfare directly boost national defense budgets.

Major economies like China, Taiwan, and the United States have increased their defense budgets over the past two years, which is a long-term growth dividend for the military industry. If a weapon can effectively reduce war casualties, procurement orders from various countries will quickly follow. The stability of this demand is a key factor attracting investors.

What Is the Essence of Military Industry Concept Stocks?

The so-called military industry concept stocks refer to listed companies whose business is related to national defense. Broadly speaking, as long as they directly or indirectly supply products or services to the military, they can be classified as military industry concept stocks. From large weapon systems to military uniforms, drinking utensils, and small items, all fall within the scope of the military industry.

The key is to understand a company’s military industry proportion. If a company’s military business accounts for less than 20% of revenue and mainly focuses on civilian business, its stock performance may not keep pace with military industry dividends. This is an important indicator to review before investing.

Pure Military Stocks vs. Hybrid Companies

Before investing in military industry concept stocks, it is essential to distinguish between two types of companies: one is pure military giants with military business accounting for over 50%; the other is mixed civilian and military companies, where fluctuations in the civilian market can drag down overall stock performance.

Advantages of Pure Military Giants

Northrop Grumman (NOC) is a textbook example of a pure military stock. This global fourth-largest defense contractor is also the world’s largest radar manufacturer, with a very high purity of military business. The company’s stock price has been steadily rising, with 18 consecutive years of dividend growth. This year, it launched a $500 million share buyback plan to maintain shareholder value.

Its core competitive advantage lies in its technological moat—focusing on strategic deterrence areas such as space, missiles, and communications technology. As long as countries worldwide perceive threats, even without actual warfare, they will increase defense investments. This structural demand makes NOC a long-term holding.

General Dynamics (GD) is one of the top five U.S. defense contractors, covering land, sea, and air forces. Although about 25% of its revenue comes from the civilian sector (mainly Gulfstream jets), its civilian customers are resilient to economic fluctuations. During the 2008 financial crisis and the COVID-19 pandemic, the company’s profits remained stable. With 32 consecutive years of dividend growth, it is one of only 30 such companies in the U.S.

Due to the long service cycles of military aircraft and weapons, GD controls costs to improve profitability, resulting in stable earnings. This business model gives GD a deep moat; growth may be limited, but risks are lower.

Risks of Hybrid Companies

Lockheed Martin (LMT) is the world’s largest defense contractor, with a steady stock price increase trend. From a long-term investment perspective, LMT is worth attention. However, its civilian sector performance also impacts overall results, so investors should not focus solely on the military segment.

Raytheon (RTX) supplies powder metal parts for Airbus A320neo aircraft, but defects have been found, which could cause engine parts to fracture under high pressure. With strong travel demand, Airbus expects to need about 350 A320neo aircraft for re-inspection over the next 3-4 years, with maintenance cycles lasting up to 300 days. This not only impacts RTX’s revenue but also exposes it to lawsuits and customer loss risks. Although military orders are growing steadily, issues in the civilian sector have caused the stock to weaken, requiring caution.

Boeing (BA) is one of North America’s two major commercial aircraft manufacturers. Its military business includes B-52 bombers, Apache helicopters, and other main products. However, its stock price plummeted due to dual blows from the civilian market: the 737 MAX crashes led to worldwide grounding, combined with pandemic-related profit declines; meanwhile, China’s commercial aircraft market is rising, threatening Boeing’s long-standing market monopoly. From an investment standpoint, Boeing’s military revenue should steadily increase, but the civilian outlook is uncertain, making it suitable for bottom-fishing rather than chasing highs.

Caterpillar (CAT) technically has less than 30% of revenue from military sources, mainly being an industrial equipment manufacturer. After wars or disasters, rebuilding cities drives demand for its equipment. Therefore, CAT is both a military concept stock and not, with business development mainly depending on global government infrastructure spending and raw material demand.

Opportunities in Taiwanese Military Industry Concept Stocks

Taiwan is at the center of global geopolitical focus, with both cross-strait military budgets drawing market attention.

Thunder Tiger Technology (8033.TW) was originally a remote-controlled model aircraft manufacturer. With the rise of the drone market, it successfully transformed into a military industry concept stock. Its stock price surged significantly in 2022. As military demand increases, this stock warrants ongoing attention.

Hanshyn (2634.TW) operates in both defense and civilian sectors. Its civilian business involves maintenance and parts sales, while its military focus is on trainer aircraft. Compared to Raytheon and Boeing, which face difficulties due to single-brand or model issues, Hanshyn’s diversified business advantage is clear—when the industry is prosperous, maintenance and repair demand will increase. Therefore, its stock performance is relatively stable and worth monitoring.

Three Investment Logic Points for Military Industry Concept Stocks

First: Ultra-Long Growth Path
Human conflicts have never ceased, and the demand for military forces is endless. The growth runway of this industry is sufficiently long.

Second: Deep Moat
Military technology often leads civilian technology by many years. Cutting-edge tech mainly exists in laboratories and military units. Due to national security concerns, industry entry barriers are extremely high, and trust takes time to build. Many patents and exclusive cooperation agreements make it difficult for leading companies to be replaced.

Third: Geopolitical Bonuses
The world is entering an era of regional politics, increasing the likelihood of war. After Trump’s “Bring Manufacturing Back to America” policy, the concept of a global village has diminished, and countries are increasing military spending. This is expected to become the norm. The sharp decline in military stocks mainly stems from “arms reduction,” which currently has a very low probability, so growth prospects remain intact.

Risks in Investing in Military Industry Concept Stocks

While the moat of military stocks is deep, investors should pay attention to:

1. Military Industry Proportion: Assess the percentage of military business in revenue; if below 20%, dividends from military are limited
2. Civilian Market: Monitor whether the company’s civilian sector faces demand decline, lawsuits, or new competitive threats
3. Financial Health: Review the company’s debt-paying ability, cash flow, and dividend sustainability
4. Geopolitical Factors: Keep an eye on global political changes affecting military orders

The good news is that core military clients are governments, and because of national defense trust relationships, governments usually won’t let core military companies go bankrupt. This provides natural protection for military industry concept stocks.

Conclusion

Military industry concept stocks are promising long-term investment targets, but thorough research is essential before choosing. The ideal stocks should have high military industry proportion, technological leadership, stable government relations, and civilian businesses that do not become burdens. Considering financial health, industry trends, global geopolitical developments, and civilian market changes comprehensively will enable wise investment decisions.