Five Under-the-Radar Defense Stocks to Buy as China and Russia Threaten Other Countries

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Posted: Nov 23, 2021 12:56 PM

Five under-the-radar defense stock to buy have the potential to jump as China and Russia increasingly threaten neighboring countries.

The five under-the-radar defense stocks to buy with China and Russia posing growing threats to other nations feature companies that serve key roles but are lesser known than the industry giants. Those five under-the-radar stocks to buy provide components or products to help peace-loving nations deter hawkish leaders in China and Russia who otherwise may see weakness and choose to attack or bully.

Doubters of the potential risk of war do not need to look any further than July 2021 when the Chinese Communist Party (CCP) aired a video in its native language that warned Japan of a nuclear response and “full-scale war” if the island nation interferes in its planned annexation of Taiwan. The video appeared on a channel approved by the CCP and singled out Japan as the one exception to China’s stated policy to not use nuclear weapons against non-nuclear powers.

China’s Threat to Attack Japan May Fuel Five Under-the-Radar Defense Stocks 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. The threats of annihilation came two weeks after Japan’s Deputy Prime Minister Taro Aso said his country must “defend Taiwan,” The Japan Times reported.

Japanese political figures expressed support for acquiring nuclear-powered, not nuclear-armed, submarines in the 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 that warns Australia not to interfere with China’s policies regarding its territorial claim on Taiwan.

Five Under-the-Radar Defense Stocks to Buy Amid Russia’s Military Might

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 gunman 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.

Nuclear-Powered Submarine Contractor Leads Five Under-the-Radar Defense Stocks 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 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 Nimitz-class carriers.

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 were built for nearly double the price at $12.8 billion, with research and development costs adding $4.7 billion. Among its many advantages, the Ford class ships will be able to mount laser self-defense weapons.

BofA Rates BWX Technologies as One of Five Under-the-Radar Defense Stocks to Buy

BofA Global Research gives BWXT a buy rating and 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.

Chart courtesy of www.stockcharts.com

Crane Gains Spot Among Five Under-the-Radar Defense Stocks 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

Embraer Earns Berth Among Five Under-the-Radar Defense Stocks to Buy

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, Intelligence, Surveillance and Reconnaissance (ISR) and space. 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 produce 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.

Spirit AeroSystems Snags Spot With Five Under-the-Radar Defense Stocks to Buy

Spirit AeroSystems Holdings, Inc. (NASDAQ: SPR), of Wichita, Kansas, manufactures aerostructures 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 some 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

Teledyne Takes Final Place Among Five Under-the-Radar Defense Stocks to Buy

Teledyne Technologies Inc. (NASDAQ: TDY), of Thousand Oaks, California, 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 Certain States

The highly transmissible Delta variant of COVID-19 has continued to plague the United States and other regions of the world with new cases and deaths. Public health experts and government leaders still are urging increased vaccinations and booster shots, as well as mask wearing.

The Centers for Disease Control and Prevention (CDC) specifically has blamed the 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. 23, 230,669,289 people, or 69.5% of the U.S. population, have received at least a single dose of a COVID-19 vaccine, the CDC reported. The fully vaccinated total 195,973,992 people, or 59%, of the U.S. population, according to the CDC.

COVID-19 deaths worldwide, as of Nov. 23, topped the 5 million mark, soaring to 5,165,655, according to Johns Hopkins University. Worldwide COVID-19 cases have jumped past 250 million, reaching 258,783,367 on that date.

U.S. COVID-19 cases, as of Nov.23, soared to 47,980,780 and caused 773,770 deaths. America has the dubious distinction as the country with the most COVID-19 cases and deaths.

The five under-the-radar defense stocks to buy as China and Russia engage in saber-rattling actions and hostile words have the potential to rise significantly if the leaders of these countries intensify their threats 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 JournalInvestor’s Business DailyUSA 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 othersCall 202-677-4457 for multiple-book pricing.

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