3 Defense Stocks Set to Benefit From Increased Military Spending

Some investors downplay the link between politics and investing, and sometimes Capitol Hill events have little impact. But if it were all irrelevant, why would so many members of Congress trade stocks based on the information they receive?

Reality shows that sometimes, our nation’s leaders leave promising investment opportunities hiding in plain sight. For example, on March 14, Congress passed a continuing resolution (CR) to fund the government through the summer. Not only does this prevent a government shutdown, but it also highlights the new Congress’s priorities, helping investors identify key opportunities.

One of those areas will be defense spending. Many defense stocks have been selling off over concerns that the defense budget would be cut as part of the ongoing Department of Government Efficiency (DOGE) initiative. However, in the new CR, the Department of Defense (DoD) will receive an additional $7 billion in funding.

That means it may be time for investors to look at three defense stocks that are setting up to be strong performers in 2025.

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Lockheed Martin: A Defense Sector Leader at a Discount

Lockheed Martin Corp. (NYSE: LMT) is one of the largest defense contractors in the world. The company is coming off a record revenue year in 2024. However, that could explain why the stock is down over 17% from its October 2024 highs.

Some contrarians argue that LMT stock may lose appeal if a potential peace dividend emerges from the end of the Russia-Ukraine war. The U.S., and by extension Lockheed Martin, has supplied significant defense resources to Ukraine despite some restrictions on aid.

But at a time when efficiency is the emphasis, the United States is likely to continue increasing the defense budget to modernize and ensure that our military has everything it needs to fight the wars of the future. That includes AI and cybersecurity capabilities, which Lockheed can provide.

Plus, investors are getting LMT stock at an attractive price-to-earnings (P/E) ratio of around 21x earnings and approximately 17x forward earnings. Both numbers give the stock an attractive discount to the average P/E of aerospace stocks, which is around 25x.

Why Northrop Grumman’s Backlog Gives Investors Peace of Mind

The case for Northrop Grumman Corp. (NYSE: NOC) is similar to that of Lockheed Martin. It’s one of the top defense contractors, coming off a stellar year with revenue topping $41 billion, but NOC stock is down about 8% in the past six months.

Going back to that revenue number, Northrop was awarded over $50 billion in contracts in 2024, leaving the company with a record backlog of $91.5 billion.

One of the company’s most high-profile contracts is the B-21 Raider for the United States Air Force (USAF), which will replace the B-1B Lancer and B-2 Spirit fleets. With no immediate concern of contraction in the defense budget and several European nations looking to increase their defense spending, those contracts look safe.

And like Lockheed, NOC stock is trading at an attractive valuation. Both its current and forward P/E ratios are around 17x.

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Axon’s Law Enforcement and Government Contracts Drive Long-Term Growth

Investors can’t say that Axon Enterprise Inc. (NASDAQ: AXON) is a cheap stock. AXON currently trades at a P/E of 139x and a forward P/E of 351x. The company is a leading provider of technology solutions such as less-lethal weapons (e.g., tasers), body cameras, and cloud-based software. Although primarily used by law enforcement personnel, Axon does have contracts with the U.S. government, including the U.S. Border Patrol.

One intriguing statistic about Axon is how rapidly analysts are raising their price targets. AXON stock has been up 73% in the last 12 months. However, 12 months ago, that price was just over $300 and was about 3% above consensus.

Just three months ago, when the AXON stock price was in the $580 to $590 range, analysts considered it 20% overvalued compared to consensus. But today, with the stock price around $540, AXON trades at an 11% discount to the consensus target.

Written by Chris Markoch

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