In this article, we will take a look at the 10 most undervalued defense stocks to buy according to hedge funds. To see more such companies, go directly to 5 Most Undervalued Defense Stocks To Buy According To Hedge Funds.
The Russian invasion of Ukraine and President Biden’s pledge to continue helping Ukraine against the Russian aggression have provided a strange boost to the defense sector, where spending seems to keep gaining momentum despite inflation worries for the rest of the industries.
According to Bloomberg, Mary Ann Bartels, chief investment strategist at Sanctuary Wealth, who has a positive outlook on the market based on her view that the broader market will start gaining momentum in the second half of 2023, believes any “pullback in the coming weeks and months will be an opportunity to buy.” The analyst specifically favors aerospace and defense stocks.
“Immune to Economic Shock”
Increasing geopolitical tensions made the defense sector virtually immune to the broader market turmoil unfolding in 2022. A Bloomberg report in May 2022 cited Richard Aboulafia, a managing director with consultancy AeroDynamic Advisory, who said the following on the outperformance of the defense sector relative to the market:
“You’re immune from economic shock, because the market for defense goods bears no relation to commercial demand for anything in the civil economy.”
Some of the most notable US defense stocks that are gaining in this backdrop are Lockheed Martin Corp (NYSE:LMT), Northrop Grumman Corp (NYSE: NOC) and Howmet Aerospace Inc (NYSE: HWM).
Defense companies in Europe are also enjoying surging profits as major powers of the continent come to terms with the reality of the Russian threat and resolve to brace for the future in terms of military preparedness. BAE Systems PLC, Saab and Kongsberg Gruppen ASA have recently posted their 2022 numbers which show positive effects of the increasing military spending in Europe. A WSJ report published in February quoted McKinsey estimates which suggest that military spending in Europe will increase a whopping 53% to touch $481 billion in 2026 from 2021.
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Our Methodology
For this article, we first used the Finviz stock screener to identify stocks from the aerospace & defense category which have PE ratios under 35, which is much lower than the industry PE average of 53 as of February 27. From the long list of the stocks in the resultant dataset, we picked 10 pure-play defense stocks with the highest number of hedge fund investors. To gauge hedge fund sentiment we used Insider Monkey’s proprietary database of 943 hedge funds and their holdings as of the end of the last quarter of 2022.
Most Undervalued Defense Stocks To Buy According To Hedge Funds
10. Moog Inc. (NYSE:MOG-A)
Number of Hedge Fund Holders: 19
New York-based Moog Inc. (NYSE:MOG-A) is one of the most notable defense companies in the world. Moog Inc. (NYSE:MOG-A) makes defense systems related to counter-unmanned aerial systems (C-UAS), fast ammunition handling, missile steering, turreted weapons, and quiet undersea actuation.
As of the end of the last quarter of 2022, 19 hedge funds reported owning stakes in Moog Inc. (NYSE:MOG-A). The total value of these stakes was about $124 million. The biggest stakeholder of Moog Inc. (NYSE:MOG-A) was Richard S. Pzena’s Pzena Investment Management, which had a $29 million stake in the firm.
In February, Moog Inc. (NYSE:MOG-A) increased its quarterly dividend by about 3.8%.
9. AAR Corp. (NYSE:AIR)
Number of Hedge Fund Holders: 20
In the defense sector, the Illinois-based aviation company AAR Corp. (NYSE:AIR) works with the US government, providing aircraft maintenance programs, Contractor Logistics Support (CLS), Performance-Based Logistics (PBL), and Third-Party Logistics (3PL). In addition to Lockheed Martin Corp (NYSE:LMT), Northrop Grumman Corp (NYSE:NOC) and Howmet Aerospace Inc (NYSE:HWM), AAR Corp. (NYSE:AIR) is one of the notable defense stocks to watch in the current market environment.
It is one of the most undervalued defense stocks to buy according to hedge funds. A total of 20 hedge funds tracked by Insider Monkey reported owning stakes in AAR Corp. (NYSE:AIR) at the end of the fourth quarter of 2022.
Carillon Tower Advisers made the following comment about AAR Corp. (NYSE:AIR) in its Q3 2022 investor letter:
“AAR Corp. (NYSE:AIR) supplies aftermarket products and services to the global aviation and aerospace industries. Sales to commercial customers continued to improve in the prior quarter but failed to meet expectations, while sales to government customers declined as key programs neared completion.”
8. Curtiss-Wright Corporation (NYSE:CW)
Number of Hedge Fund Holders: 22
Curtiss-Wright Corporation (NYSE:CW) is an aviation company that makes civil and defense applications and products. Curtiss-Wright Corporation (NYSE:CW)’s defense offerings relate to air, land, sea, space, cyberspace, and industrial applications. Curtiss-Wright Corporation (NYSE:CW) ranks 8th in our list of the most undervalued defense stocks to buy according to hedge funds.
During the fourth quarter of 2022, Curtiss-Wright Corporation (NYSE:CW)’s adjusted EPS came in at $2.92, beating estimates by $0.01. Revenue in the period increased by about 15.7% on a YoY basis to reach $758 million, beating estimates by $5.77 million. For 2023, Curtiss-Wright Corporation (NYSE:CW) sees its sales coming in the range of $2.66 billion to $2.71 billion, versus the consensus estimate of $2.70 billion. Adjusted EPS in the full year is expected to come in the range of $8.65 to $8.90.
As of the end of the fourth quarter of 2022, 22 hedge funds out of the 943 funds tracked by Insider Monkey reported owning stakes in Curtiss-Wright Corporation (NYSE:CW). The biggest hedge fund stakeholder of Curtiss-Wright Corporation (NYSE:CW) according to Insider Monkey’s database is Robert Joseph Caruso’s Select Equity Group which owns a $99.2 million stake in the company.
7. BWX Technologies, Inc. (NYSE:BWXT)
Number of Hedge Fund Holders: 33
BWX Technologies, Inc. (NYSE:BWXT) provides nuclear components to the US government. BWX Technologies, Inc. (NYSE:BWXT) is operating several business units. One of its units makes naval nuclear reactors for the Naval Nuclear Propulsion Program. This defense stock is in the spotlight these days as the company recently upped its dividend by 4.5%.
BWX Technologies, Inc. (NYSE:BWXT)’s adjusted EPS in the fourth quarter came in at $0.93, meeting estimates. For fiscal 2023, BWX Technologies, Inc. (NYSE:BWXT)’s revenue is expected to be $2.4 billion. EPS in the period is expected in the range of $2.80-$3.00 versus the consensus of $2.87.
As of the end of the fourth quarter of 2022, 33 hedge funds had stakes in BWX Technologies, Inc. (NYSE:BWXT), up from 28 hedge funds in the previous quarter. Hedge funds also like Lockheed Martin Corp (NYSE:LMT), Northrop Grumman Corp (NYSE: NOC) and Howmet Aerospace Inc (NYSE: HWM).
Here is what Upslope Capital specifically said about BWX Technologies, Inc. (NYSE:BWXT) in its Q3 2022 investor letter:
“BWX Technologies, Inc. (NYSE:BWXT) is a leading producer of nuclear reactors, components, and fuel, primarily for the power and propulsion of U.S. Navy subs and carriers. I sold our position and replaced it with CACI (detailed below). While I remain intrigued by the BWX story – unique product set, optionality outside of defense, and prospect of accelerating free cash flows – I became concerned with elevated management turnover (Chairman, CFO, CAO, and two division heads in the last year). Given the above-normal trust required in management for the thesis (believing capex will normalize and boost free cash flow soon and murky, long-tailed investments outside of defense), I decided to move on.”
6. Huntington Ingalls Industries, Inc. (NYSE:HII)
Number of Hedge Fund Holders: 34
Naval ships manufacturer Huntington Ingalls Industries, Inc. (NYSE:HII) ranks 6th in our list of the most undervalued defense stocks to buy according to hedge funds. As of February 28, Huntington Ingalls Industries, Inc. (NYSE:HII) has a PE ratio of 15.11. It has gained about 6% over the past 12 months. Hedge fund sentiment for Huntington Ingalls Industries, Inc. (NYSE:HII) is also strong. Insider Monkey’s database shows that 34 hedge funds had stakes in Huntington Ingalls Industries, Inc. (NYSE:HII) at the end of the fourth quarter of 2022, up from 24 hedge funds in the previous quarter. Dmitry Balyasny’s Balyasny Asset Management, Cliff Asness’ AQR Capital Management and Rajiv Jain’s GQG Partners are among the top hedge fund stakeholders of Huntington Ingalls Industries, Inc. (NYSE:HII) as of the end of 2022.
Huntington Ingalls Industries, Inc. (NYSE:HII) is also a dividend payer. Recently, it declared a quarterly dividend of $1.24 per share, the same as in the previous dividend. Forward yield came in at 2.29%. The dividend was payable on March 10 to shareholders of record as of February 24.
In February, Huntington Ingalls Industries, Inc. (NYSE:HII) posted its Q4 results. While GAAP EPS of $3.07 missed estimates by $0.23, the revenue of Huntington Ingalls Industries, Inc. (NYSE:HII) showed a 4.5% YoY growth.
For 2023, Huntington Ingalls Industries, Inc. (NYSE:HII) expects its shipbuilding revenue between $8.4 billion and $8.6 billion.
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Disclosure: None. 10 Most Undervalued Defense Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.