Investing in Defense Stocks

Leidos Holdings is the largest government information technology (IT) company. It has also actively expanded into hardware, providing the electronics and brains for autonomous ships and building a strong portfolio of classified research capabilities geared for the intelligence and space communities.

The push to make government more efficient comes with both risks and rewards for these IT companies. Leidos and other IT companies specialize in providing services that were once done in-house at a lower cost, which could create opportunities. But government watchdogs aiming to cut overall costs will be looking closely at these contracts for ways to save.

7. L3Harris Technologies

L3Harris Technologies was formed from the 2019 merger of Harris Corp. and L3 Technologies. Both were defense-electronics and sensor suppliers that hoped to use their combined scale to better-compete against the bigger contractors for prime positions on defense contracts.

The company has spent most of the decade streamlining its portfolio and investing in new technologies. Today, it is a major vendor of tactical communications and reconnaissance systems, night-vision equipment, and complex space sensors as well as other defense electronics products.

8. AeroVironment

AeroVironment is a leader in drones, developing a sophisticated line of small- and medium-sized aircraft that have proven to be invaluable in the war in Ukraine. That conflict has been a proof-of-concept for AeroVironment, getting the company on the radar screen of military buyers at the Pentagon and with U.S. allies.

AeroVironment is still early in its growth cycle. In early 2025, the company acquired BlueHalo to increase its presence in the market for larger drones as well as autonomous water systems and space technology.

Early in the year, the Pentagon sends a funding request to Congress, which then holds hearings to discuss priorities and make final allocation choices throughout the spring and into the summer. An investor need not hang on every word. However, the budget request, available on the Pentagon's website, and commentary elsewhere can provide clues about which billion-dollar programs are administration priorities.

Follow the numbers

Companies often highlight massive contract awards in press releases without explaining that those big-dollar figures are often spread out over many years and may depend on Congress approving the funds. Pay attention to these metrics when evaluating defense stocks:

• Free cash flow: This is important for any business, but free cash flow can vary for defense contractors based on whether their projects are new or well established. Companies often spend more in the early stages of a production contract, temporarily depressing cash flow.
• Corporate backlogs: Investors should pay close attention to corporate backlogs, which are future contracts that have been awarded but not yet executed. How much of a backlog has been funded and how much must go through the congressional budgeting process can vary greatly.
• Book-to-bill ratio: This metric compares the value of orders received in a given quarter to the amount billed and indicates a company's growth potential. A growing company should have a book-to-bill ratio of at least 1.0, implying that orders for future products are being booked at a rate that equals or exceeds what is being shipped today.

Defense companies know investors are focused on these metrics and typically provide the relevant information in quarterly earnings reports or conference calls.

Related investing topics

Defense companies get the bulk of their revenue from one customer -- the U.S. government. Fortunately, that customer has deep pockets and a long history of paying its bills. The federal government’s stability gives defense companies and investors some predictability when it comes to managing cash and projecting growth.

Lockheed Martin is the world's largest defense company and the U.S. government's biggest contractor. It's also the lead contractor on the F-35 Joint Strike Fighter, the world's most expensive airplane.

Lockheed's legendary Skunk Works research facility in California is world-renowned. The company has leveraged its research muscle to become a leader in advanced fighter planes, high-tech missiles, and cutting-edge electronics.

2. Boeing

Boeing is best known for its commercial airplanes, but its defense business -- although accounting for just one-third of total company revenue -- is large enough to rank among the industry's titans. Boeing makes several aircraft and helicopters for the Pentagon and is involved in space pursuits. The company's defense business has also branched out into autonomous submarines and other products.

Boeing has been a tough stock to own over the past year due to issues stemming from its commercial side, but the company remains an important vendor to the U.S. government. If the company can successfully work through the operational troubles that have plagued it, there is a lot of upside potential for the stock.

3. Northrop Grumman

General Dynamics is one of two primary military shipbuilders and has a portfolio of tanks and land vehicles, making it one of the go-to vendors for the U.S. Army. General Dynamics also has one of the largest defense-focused IT and services businesses, giving it some revenue stability at times when the Pentagon cuts back on equipment purchases.

Ship construction is complex, and individual vessels can take years to complete, creating some quarter-to-quarter revenue inconsistency. General Dynamics tries to offset that choppiness via its more-predictable IT business, but investors should be aware that the mix of businesses can make it difficult to predict quarterly results.

5. RTX

RTX, formerly Raytheon Technologies, doesn't make warships or fighters. However, it does have a role in a wide range of important military platforms led by other contractors. It is the product of the 2020 merger between Raytheon, a defense electronics and missile specialist, and United Technologies, which makes aircraft engines and various other aerospace parts.

The Pentagon has expended some of its stockpile of weapons in recent years, which should lead to significant demand for missiles and other RTX goods in the years to come. The company also gets some upside from its commercial business, which has enjoyed a multiyear cycle of strong demand for spare parts to keep the existing aviation fleet aloft.

6. Leidos Holdings