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Defense contractor stocks may help protect your portfolio from a summer of geopolitical risks.
"I think using an ETF like an Invesco Aerospace & Defense (PPA) that gets you broad exposure probably makes a lot of sense here, especially when you think about this reconciliation bill that's coming out," Innovator ETFs chief investment strategist Tim Urbanowicz said on Yahoo Finance's Opening Bid (video above). "You're looking at an additional $150 billion in defense spending. You pair that with looking at this conflict. What's going on in Russia and Ukraine defense spending is not going down. It's not going down in the US. It's not going down globally."
Top holdings in the Invesco Aerospace & Defense ETF include GE Aerospace (GE), Boeing (BA), Lockheed Martin (LMT), RTX Corporation (RTX), and Northrop Grumman (NOC).
Investors are paying careful attention to escalating tensions in the Middle East after President Trump confirmed the US launched a surprise strike on Iran's nuclear sites late Saturday.
The situation remained contentious on Monday, with Iran promising retaliation for the US strikes. Israel and Iran continued to exchange fire. Oil prices sustained their upward march amid fear of supply disruption from the Strait of Hormuz. The price of oil is up 14% since Israel's June 12 attack on Iran.
Markets, surprisingly, have taken the news in stride. The Dow Jones Industrial (^DJI), S&P 500 (^GSPC), and Nasdaq Composite (^IXIC) all clung onto gains through midmorning.
But some of the strongest gains in markets today have come from defense stocks such as Lockheed Martin and Northrop Grumman. Shares of Lockheed Martin and Northrop Grumman advanced nearly 2% each — the companies' ticker pages were among the most active on Yahoo Finance.
Northrop Grumman is gathering extra attention as it makes the B-2 stealth bomber used in the US attack on Iran's nuclear facilities.
The B-2 program accounts for about $500 million in annual revenue for Northrop Grumman, or 2% of its business, estimated Jefferies analyst Sheila Kahyaoglu.
"Escalating global conflict translates to defense stock out-performance," Kahyaoglu said.
Washington Crossing Advisors senior portfolio manager Chad Morganlander said on Opening Bid that the new conflict only emboldens his longtime bullish call on Lockheed Martin. Morganlander says he has owned the stock for close to three years and expects strong revenue growth over the next five years.
"Although Northrop is a wonderful company, and it's growing profitably and is well capitalized, we thought from the valuation perspective that Lockheed was more attractive," Morganlander explained. "It's sitting at a 2026 PE multiple of roughly 15 times. It has not had the big multiple expansion like their competitors. And we believe that there's a stream of opportunity as there's been an overhang of uncertainty regarding the F-16 or the F-22 fighter jets."
