Global arms manufacturers stock allocation guide: Analyzing geopolitical factors for investment opportunities

Why Have Defense Stocks Become the New Hotspot?

Current global developments are changing rapidly. The Ukraine war and frequent Middle East conflicts are prompting countries to reassess their national defense capabilities. Unlike the large-scale manpower-intensive wars of the past, modern military confrontations increasingly emphasize technological applications—drones, precision missiles, information warfare are becoming key to victory.

Behind this trend is a strong economic driver. According to the latest data, global military spending continues to rise. Key regions such as China, Taiwan, and the United States are increasing their defense budgets. Many companies are seizing this opportunity by providing cutting-edge defense technologies and securing substantial government contracts.

In an era of declining birthrates, countries prefer to spend money on high-tech weapon systems rather than significantly expanding military personnel. This shift is a major boon for arms manufacturers—implying long-term orders and stable revenue growth.

How to Determine if Defense Stocks Are Worth Investing In?

Not all companies labeled as “defense stocks” are worth buying. Before investing, it’s crucial to clarify the following two questions:

First, what percentage of revenue comes from military contracts? Some companies only occasionally win defense orders, with military revenue accounting for less than 10%, mainly relying on civilian products. These are not pure defense stocks; their stock prices are more influenced by the civilian market. True defense investment targets should be companies where military revenue exceeds 40%.

Second, can the company adapt to future demands? Different branches of the military have varying equipment needs. If a company relies heavily on Army orders, but the global military focus shifts to air and naval forces, future order growth could be uncertain. Therefore, it’s important to assess whether the company’s technological portfolio aligns with evolving trends—such as investments in drones, missiles, satellite communications, and other emerging fields.

Analysis of Leading U.S. Defense Contractors

Lockheed Martin (LMT): The Purest Defense Choice

Lockheed Martin is one of the world’s largest defense contractors, with over 80% of its revenue from military sales. The company focuses on missile systems, fighter jets, space defense, and more, mainly serving the U.S. Department of Defense and allied governments.

Looking at its stock performance, the long-term trend is upward, with dips mainly due to broader market corrections rather than company-specific issues. The company’s moat is deep—defense contracts involve national security, making it difficult to replace major suppliers once established. High technological barriers further prevent rapid entry by competitors. From a long-term holding perspective, Lockheed Martin is a relatively stable choice.

Raytheon (RTX): Caution Needed

Raytheon is also one of the top five U.S. defense firms, with stable growth in military orders. However, in recent years, its stock performance has been weak, mainly due to significant issues in its civilian business.

Specifically, Raytheon supplies engine components for Airbus A320neo aircraft that have quality defects. These parts use special powder metals and are prone to fractures under high pressure. As the aviation industry recovers, global airlines are rushing to buy new aircraft, and over the next 3–4 years, an estimated 350 A320neo planes will require maintenance, with each repair taking up to 300 days. This not only impacts Raytheon’s civilian revenue but also exposes it to lawsuits and compensation pressures from Airbus, potentially leading to customer loss.

The lesson for investors is: monitoring military orders alone is insufficient; the overall operational health of the company must be observed. Negative impacts from civilian business can outweigh defense gains, dragging down stock prices. Therefore, Raytheon remains a wait-and-see candidate until issues improve.

Northrop Grumman (NOC): A Technology Leader

Northrop Grumman is the fourth-largest defense contractor globally and the largest radar manufacturer. The company focuses on defense, with over 85% of its revenue from military sales.

Its advantages are clear: leading technology in the industry, with major clients being the U.S. military. Currently, its collaboration with the U.S. government centers on “strategic deterrence,” covering space defense, missile technology, communication systems, and other high-end tech. As long as geopolitical uncertainties persist, countries will continue increasing defense spending.

The company performs steadily, with 18 consecutive years of dividend growth. This year, it accelerated a $500 million share buyback plan, rewarding shareholders with tangible actions. Overall, Northrop Grumman is a pure defense company with a strong moat, suitable for long-term allocation.

General Dynamics (GD): Stable Defense Supplier

General Dynamics is among the top five U.S. defense suppliers, serving land, sea, and air forces, and also manufacturing private jets. About 70% of its revenue comes from military sales, with the remaining 30% from civilian markets.

Its unique advantage lies in revenue resilience. Although the civilian aircraft market is cyclical, it caters to high-end clients with relatively stable demand. Even during the 2008 financial crisis and the 2020 pandemic, its profits remained relatively stable. This stability makes General Dynamics a “cash cow” in the defense sector.

The company has 32 consecutive years of dividend increases. Only about 30 U.S. companies have achieved this. It is also shareholder-friendly, often repurchasing shares to maintain shareholder value. While its revenue growth is slower than pure defense firms, steady profits and dividends make it an ideal choice for conservative investors.

Boeing (BA): Civilian Risks Outweigh Defense Opportunities

Boeing is the world’s largest commercial aircraft manufacturer (another major player is Airbus in Europe) and also one of the top five U.S. defense contractors. Its military products include the B-52 bomber and Apache helicopters.

However, Boeing’s stock has plummeted in recent years, mainly due to setbacks in its civilian business. First, the 737 MAX aircraft suffered two crashes in 2018 and 2019, leading to worldwide grounding, followed by pandemic impacts, which severely hurt its civilian revenue. Second, new competitors have emerged. After the U.S.-China trade war escalated, the Chinese government began heavily supporting domestic commercial aircraft, with COMAC expected to gradually erode Boeing’s global market share, weakening its monopoly position.

Although defense orders remain relatively stable, the outlook for the civilian market is uncertain. Therefore, investing in Boeing should adopt a “bottom-up” approach rather than chasing high prices.

Caterpillar (CAT): A Pseudo-Defense Stock

Caterpillar is labeled as a defense stock, but actual military revenue accounts for less than 30%. Its main business is construction machinery and heavy equipment. The company is less a weapons supplier and more a beneficiary of geopolitical tensions driving infrastructure demand.

Similar “broadly defined defense stocks” include FedEx (( FDX)), which has participated in military logistics or government procurement but is fundamentally a civilian enterprise. Investing in such companies should focus on global infrastructure spending and raw material demand rather than defense orders.

Investment Opportunities in Taiwanese Defense Companies

The geopolitical tension across the Taiwan Strait continues to escalate, with both sides increasing military expenditure in recent years. This presents tangible benefits for local Taiwanese defense firms.

Thunder Tiger Technology (8033.TW) is a typical example. Originally a remote-controlled model aircraft manufacturer in the toy industry, it successfully pivoted into military drones amid the explosive growth of the global drone market. Its stock surged significantly in 2022. As Taiwan and other countries’ military needs grow, the company has further growth potential.

Hanchang (2634.TW) took a different route. It operates in both defense and civilian sectors, mainly producing trainer aircraft and parts for the defense side, and providing maintenance and spare parts for civilian aviation. Compared to Lockheed Martin and Boeing, which face difficulties due to single-product dependence, Hanchang’s diversified business reduces risk. As long as the aviation industry remains healthy, maintenance and repair markets will continue generating orders and profits. Its stock performance is relatively stable, making it worth tracking for the medium to long term.

Why Are Defense Stocks Worth Investing In?

Using Buffett’s investment logic, good investment targets require three conditions: a long runway, a deep moat, and a growing “snowball.” Defense stocks satisfy all three.

Extremely long industry runway: Human conflicts have never ceased throughout history; national security needs are endless. Military equipment demands are long-term and stable, unaffected by economic downturns.

Deep moat: The defense industry concerns national security, with high entry barriers and significant technological barriers. Trust between military and suppliers takes years to build, and once established, it’s hard to switch. Many technologies are protected by national patents, making supply exclusive. This makes leading companies difficult to displace.

Continuous growth drivers: Global regional political polarization and increased geopolitical conflicts lead to higher military spending. Trump’s “Made in America” policy accelerated this trend, with further retreat from globalization and regional arms races becoming normal. The sharp decline in defense stocks was mainly due to expectations of disarmament, but such prospects are currently very low, ensuring growth potential.

Risks of Investing in Defense Stocks

Defense stocks are not without risks. The most common trap is buying “pseudo-defense stocks”—companies with low military revenue share and declining civilian business. This can offset defense gains and even cause stock prices to crash.

Before investing, it’s essential to examine:

• How high is the company’s military revenue proportion?
• Is its civilian business facing market or policy risks?
• Are there ongoing lawsuits or financial issues?
• Does its technological direction align with future defense needs?

Only companies with high defense revenue, leading technology, and stable civilian business qualify as truly worthwhile defense investments.

Conclusion

Defense stocks face stable and upward market demand, but investors must be cautious in selecting targets. Understanding the true military revenue proportion, monitoring civilian business trends, and assessing technological competitiveness are prerequisites for making sound decisions.

The good news is that defense companies rarely go bankrupt—main clients are governments, with strong trust relationships, and governments are unlikely to let suppliers collapse easily. Therefore, defense stocks generally have a deep moat and are suitable for long-term investment. By comprehensively considering financial health, industry trends, geopolitical shifts, and civilian market prospects, investors can identify truly dark horse defense companies.