The three top defense stocks are poised to rise in 2017 as global military spending tops $2 trillion annually.
In fact, roughly 2.5% of global gross domestic product (GDP) is dedicated to military spending.
That's a great environment for defense stocks. So, what are the top defense stocks?
We'll tell you Money Morning's choices for the top defense stocks now in a moment. But first, here's why military spending is making our three defense stock picks some of the best investments on the market today...
Military Spending Will Propel Our 3 Defense Stock Picks
Money Morning Chief Investment Strategist Keith Fitz-Gerald has long believed that his "Unstoppable Trends" are the best way to identify companies that will give investors good returns.
Unstoppable Trends are social, political, and cultural forces that will happen whether markets are up or down. The six Unstoppable Trends are:
- War, Terrorism, and Ugliness
- Technology
- Health
- Demographics
- Energy
- Scarcity
Stocks that are firmly based in the Unstoppable Trends and smartly managed will outperform the markets. Even if the markets correct, their companies' products will still be bought. And if their products are still bought, revenue will roll in. Then profit will result. And profit is the force that drives share-price moves.
Now, as Fitz-Gerald observes, it's not a good thing that the Unstoppable Trend of War, Terrorism, and Ugliness is on the rise throughout the world.
But this trend is a reality...
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As populations rise and gain access to new technology (including technologies of war), some of them grasp bad ideas. These bad ideas take root and grow. And somewhere, War, Terrorism, and Ugliness ensues.
Some of our top defense stocks now are highly invested in stopping wars and preventing accelerations of this Unstoppable Trend. So don't see investing in our top defense stocks now as pro-war, but as more of a concern with protection, rather than aggression.
The United States leads the world in military spending. The $596 billion spent here is 37% of the worldwide total spent on defense, according to experts at the Stockholm International Peace Research Institute.
The next largest military spenders are: China, Saudi Arabia, Russia, the United Kingdom, India, France, and Japan. These countries account for $567 billion in military spending, according to the National Priorities Project.
Going forward, Fitz-Gerald believes that these countries - including the United States - will all be increasing their military spending to protect their resources.
Moreover, many of these seven next-largest spenders will be developing economically. As they do, more of their GDP can be dedicated to technology. And that encompasses military technology.
That's one big reason military spending will grow.
But the other reason is that countries all across the globe pursue military spending. Peaceful countries invest in defense to prevent war.
Other countries who want more resources, expanded territory, or that have specific belief systems, invest in military spending for aggression and conquest.
All of Money Morning's top defense stocks now are based in the United States. They will benefit heavily from President-elect Donald Trump's views on the military and the Pentagon.
During Trump's campaign for presidency, he repeatedly criticized President Obama for not spending enough on the military. The top defense stocks now have already done very well in 2016, with double-digit gains.
Now they stand to do very well in 2017, too...
Here are our three top defense stocks to buy now...
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Top Defense Stocks No. 1: Lockheed Martin Corp.
The biggest defense company by market cap is Lockheed Martin Corp. (NYSE: LMT). It's also our first pick for the top defense stocks now. The company makes defense, security, and technology goods all over the globe.
The United States devotes over 3% of its annual GDP to defense spending. LMT sees a substantial chunk of this every year.
One of its products is the F-35 fighter jet. Lockheed has contracts with the Pentagon for 2,400 F-35s, and also manufactures them for countries allied with the United States. These contracts add up to billions.
LMT also offers investors a handsome dividend. It's currently $7.28 with a yield totaling 2.88%. That's much higher than the average S&P 500 dividend. LMT has grown its dividend for 13 consecutive years.
LMT shares are up nearly 16% on the year.
Top Defense Stocks No. 2: Raytheon Co.
Raytheon Co. (NYSE: RTN) develops and manufactures engineering technology for defense systems, information technology, and government electronics.
Its biggest profitable areas are Integrated Defense Systems (IDS) and Missile Systems (MS).
The IDS segment recently gained a $265 million contract to produce the Patriot Air and Missile Defense System for countries allied with the United States. The segment also was granted a $92 million contract for new production on the U.S. Navy's radar program.
Somewhat surprisingly, almost 33% of Raytheon's revenue stems from countries overseas. Middle Eastern and African countries buy Raytheon products as defense against hostile neighbors.
The United States makes up the remaining two-thirds of its product base.
FactSet reports that Raytheon's average target share price is $159. Almost 75% of Wall Street analysts surveyed by FactSet have a "Buy" rating on RTN.
RTN also offers a strong dividend with a 2.05% yield.
Top Defense Stocks No. 3: Northrup Grumman Corp.
Northrup Grumman Corp. (NYSE: NOC) derives revenue from three segments: Aerospace Systems, Electronic Systems, and Information Systems.
NOC and LMT have close ties with each other. They work jointly on the F-35 fighter jet. Northrop develops the tracking computers, radar, and navigational tools for the advanced fighter jet.
Aerospace Systems is the company's No. 1 segment for profitability, making up almost 40% of NOC's total revenue. In 2015, Aerospace Systems was responsible for $10 billion in revenue, as reported by FactSet.
Aerospace Systems' revenue was a primary driving force behind a nearly 17% advance in Q3 profit, which caused a nice upward move in NOC's share price.
Northrop shares are up 32% in 2016, a higher climb than either of the other two top defense stocks now. NOC also has a strong dividend, at $3.60 annually. The dividend has grown over the last eight consecutive years. The yield is now 1.44%.
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