The 3 Best Defense Stocks to Buy Now as $717 Billion Floods into the Industry

The U.S. military is planning to pour billions of dollars into the purchase of more ships and planes over the next few years.

And we've uncovered the three best defense stocks to buy now to exploit this unusually lucrative opportunity.

Concerned about the likelihood of a conventional armed conflict with a large power like China or Russia (or perhaps to deter one), the Department of Defense has ramped up spending over the past couple of years.

Total U.S. military spending jumped from $590 billion in fiscal 2017 to $692 in fiscal 2018. And the defense authorization bill for fiscal 2019, which was approved in August, raised spending to $717 billion.

As you can see, military spending had been in a slow decline, but it's now set to reach record highs over the next decade...

best defense stocks to buy now

And planning for future expansion ensures that spending will continue to rise over the next several years...

Why Military Spending Is Rising

A big chunk of the additional spending is going toward the growth of the Navy and Air Force.

The Air Force is planning to grow by 24%, which translates to hundreds of new aircraft filling out 74 new squadrons.

The Navy has set a goal of increasing its fleet from about 285 now to 355 ships by 2032. Much of that will require new shipbuilding, although the Navy is also considering programs that will extend the service life of its ships.

No matter how you slice it, there will be a lot of new work available for defense contractors.

And while future authorizations of higher defense spending aren't guaranteed, it's as close to a sure thing as you'll find in this world.

Prospering During a Financial Crisis: Incredible wealth-building opportunity for those who are prepared - quickly amass a potential $1.5 million retirement nest egg. Learn more...

You'll notice that defense authorization bills are rarely controversial and usually pass with little fanfare. In fact, the most recent bill passed in August by a vote of 87-10 in the Senate and 359-54 in the House.

Because it is spread generously around to the 50 states, legislators are loathe to vote against defense spending - it keeps a lot of folks back home employed.

So the only question is how investors can best capitalize on this opportunity.

For sure, the major defense stocks will all benefit. Names like Lockheed Martin Corp. (NYSE: LMT), Northrop Grumman Corp. (NYSE: NOC), Raytheon Co. (NYSE: RTN), and Boeing Co. (NYSE: BA) are all solid plays on the growth in defense spending.

There's even an ETF (exchange-traded fund), the iShares U.S. Aerospace & Defense ETF (BATS: ITA), for those who prefer broad exposure to the sector.

But we've found three companies that, according to their high Money Morning Stock VQScores™, are the best defense stocks to buy now...

The 3 Best Defense Stocks to Buy to Profit from the Military Spending Spree

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

Beyond the well-known names, the defense sector is loaded with smaller companies that supply products and services both to the U.S. military directly as well as to the large contractors that actually build the weapons.

Three such companies currently have VQScores of 4.00 or higher - the highest range on the four-level scale and what we like to call the "buy zone."

L3 Technologies Inc. (NYSE: LLL)

VQScore: 4.15

L3 Technologies isn't one of the majors of the defense sectors, but it aspires to be. It's a diversified contractor that produces surveillance and reconnaissance systems as well as aircraft simulation and training, among other things. The company stands to benefit in many ways from the growth of the U.S. military. The company provides many of the electronics used in Navy vessels, electronics and training systems for the Air Force, and tools like vision goggles for the Army.

L3 Technologies has been a company in transition the past couple of years. It shed some units while acquiring at least eight companies. But now it's poised to take advantage of the big spike in government spending.

The FactSet consensus for L3's earnings predicts growth from $8.47 a share in 2017 to $15.84 by 2022. At a price/earnings ratio of 19 (the current P/E) that suggests a price of about $300 a share - a gain of nearly 42% over the current price of $211.61. The FactSet one-year consensus target is $247.13 - a gain of nearly 17%. LLL also has a dividend yield of 1.52%.

ESCO Technologies Inc. (NYSE: ESE)

VQScore: 4.45

ESCO manufactures filtration and fluid-control products for the aviation, space, and process markets. Its innovations extend to several other businesses such as RF shielding, packaging and software, and services for the renewable energy industry.

It was spun off from Emerson Electric Co. (NYSE: EMR) in 1990. The filtration/fluid flow systems that make up 41% of the company's sales provides most of its military business.

ESCO has contracts with the Navy, NASA, and Lockheed Martin for these products. Demand should remain strong as the military orders more ships and planes. All three analysts covering ESE have a "Buy" rating on the stock. The FactSet one-year consensus target price is $74.33, an 11.64% gain over the current price of $66.58.

VSE Corp. (NASDAQ: VSEC)

VQScore: 4.75

VSE Corp. provides a range of supply chain management and maintenance services to the government, including the Army, Navy, and Air Force.

Despite its relatively low market cap - at $352 million it sits near the border between small caps and micro caps - VSE ranks among the top 100 defense contractors, top 10 foreign military sales contractors, and top 50 Navy contractors in the nation. The rise in defense spending bodes very well for this company.

VSE is truly off Wall Street's radar - no analysts currently cover it - but its highest-possible VQScore of 4.75 is just one indication this stock is worth a look. Revenue grew from $424.1 million in 2014 to $760.1 million last year, while earnings per share has increased from $1.81 to $3.61. And its price/earnings ratio is below 9 right now - far below the S&P 500 average of 25.43. This is clearly an undervalued company right now that could easily see its stock price (currently $32.56) double over the next couple of years. VSEC has a dividend yield of about 1%.

From Juvenile Delinquent to No. 1 Strategist in America: 119 Trades, 0 Realized Losses

He was born into poverty. When he was 16, his mother kicked him out of the house.

After that, he dropped out of high school and spent most of his days drinking, partying, and getting arrested.

Today, he's the only undefeated strategist in the business. He's closed out 32 winning trade recommendations in a row. His average gain is 70%.

And he hasn't taken a loss on a single trade.

Do you know anyone else who can say that?

Follow me on Twitter @DavidGZeiler and Money Morning on Twitter @moneymorning, Facebook, or LinkedIn.

About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

Read full bio