Shares in the world's leading defense contractor, Lockheed Martin (LMT +2.04%), rose 3.5% on the opening of trading as the market rushed to buy into defense stocks in the wake of recent events in Venezuela. It's an understandable reaction to a ratcheting of geopolitical tensions and the creation of political uncertainty.
A short-term impact
Equating geopolitical upheaval with a more promising outlook for defense stocks makes sense, however unfortunate or fortunate the circumstances behind it may be. Still, it also makes sense to reflect on what it actually means for defense stocks. In previous decades, the calculation was relatively simple; potentially, more revenue means more profitability for defense contractors.
NYSE: LMT
Key Data Points
Again, there's an obvious logic behind this approach, but investors also have to recognize that defense contractors have had significant margin challenges in recent years, not least from problematic fixed price development programs that have caused billions of dollars of cost overruns, charges, and losses at companies such as Lockheed Martin, RTX, and Boeing.
It's unclear whether these issues are temporary, related to soaring costs on programs due to the supply chain crisis and some of the same geopolitical conflicts that have created demand for defense products, or whether they are a longer-term structural issue caused by governments negotiating harder and insisting on fixed-price programs.
Image source: Getty Images.
Where next for Lockheed Martin
It strikes me that the key for stocks like Lockheed Martin in 2026 is to demonstrate they can meaningfully and sustainably grow margins and deliver on key programs such as the F-35 strike fighter. That question won't be resolved by anything that happens in Venezuela.
