Arms Stock Investment Opportunities: Growth Wave Driven by Global Defense Spending

In recent years, global geopolitical conflicts have become more frequent. From the Russia-Ukraine war to the Israel-Palestine conflict, these regional clashes not only raise humanitarian concerns but also fundamentally alter national defense strategies and military spending allocations. Unlike traditional warfare, contemporary conflicts have shifted toward technology-driven domains, including drone warfare, precision missiles, and information warfare. This transformation has directly created investment opportunities in defense stocks. China, Taiwan, the United States, and major countries worldwide have continuously increased their defense budgets, fueling unprecedented growth momentum in the defense industry.

Why Are Defense Stocks Worth Watching? Geopolitical Reshaping

Defense stocks are publicly traded companies engaged in the defense industry, covering everything from large weapon systems to small military equipment. Any enterprise primarily serving government defense agencies falls into this category. Broadly speaking, companies with direct or indirect dealings with the defense department can be considered as part of the defense concept stocks.

Recent regional conflicts highlight an important shift: victory in war no longer depends solely on troop numbers but increasingly on technological advantage and tactical innovation. This realization has accelerated the development of drones, precision missiles, and information warfare technologies worldwide, aiming to enhance military effectiveness while reducing personnel casualties. As global birth rates decline, countries prefer to invest in technology rather than manpower expansion to maintain defense capabilities. This strategic shift provides a stable demand foundation for defense stocks.

Core Principles for Selecting Defense Stocks: Military Industry Ratio and Business Structure

Before investing in defense stocks, it’s crucial to understand a key indicator: the proportion of revenue from military-related business. If a company’s military segment is too small, its stock price often won’t fully benefit from the upward cycle of the defense industry. When evaluating defense stocks, investors should focus on whether military business is a major revenue source.

Additionally, the diversity of a company’s business structure is an important consideration. Some stocks operate in both civilian and military markets. When military demand is strong, but the civilian side faces market difficulties, the overall performance may suffer. Another aspect to watch is the company’s adaptability— as defense needs shift from land forces to air and naval forces, suppliers of relevant equipment will find more opportunities. Based on regional military dominance, future order growth is expected mainly in air and naval defense sectors.

Leading Global Defense Stocks: The Top Five U.S. Defense Contractors

Lockheed Martin (LMT): A Steady Growth Leader in Defense Technology

Lockheed Martin, one of the largest U.S. defense contractors, mainly engages in missile systems, space systems, information technology, and maritime equipment. From a long-term investment perspective, its stock price has shown steady upward movement, with dips mainly due to broader market corrections rather than deteriorating fundamentals. The company is highly pure in the defense industry, with a large share of its revenue from military business, making it especially beneficiaries of increased global defense spending.

Raytheon Technologies (RTX): A Defense Giant Facing Short-Term Challenges

Raytheon has historically been a key player in U.S. defense but has recently encountered complex operational difficulties. Its civilian market segment faces serious issues, notably with parts supplied to Airbus A320neo aircraft, which have experienced design flaws leading to extensive maintenance. Market expectations suggest that over the next 3-4 years, about 350 aircraft will need re-inspection annually, with each maintenance cycle potentially lasting 300 days. This not only erodes profits but also exposes the company to legal and reputational risks. While military orders remain steady, the drag from the civilian side has resulted in weak overall stock performance. This case reminds investors to consider non-defense business performance when evaluating defense stocks.

Northrop Grumman (NOC): The Deepest Tech Moat in Defense

Northrop Grumman is the fourth-largest defense manufacturer globally and the largest radar producer, representing a quintessential defense stock. Known for its stable profitability, its stock has been trending upward with 18 consecutive years of dividend growth. The company is accelerating a $500 million share buyback program to enhance shareholder value. Its technology is at the forefront globally, currently collaborating with the U.S. military on “strategic deterrence” projects, including space, missile, and communications technologies. Even without actual warfare, countries will continue to increase defense investments for security reasons, ensuring long-term growth for defense stocks. With its strong technological moat and steady cash flow, Northrop Grumman remains a top choice for long-term investors.

General Dynamics (GD): A Stable, Diversified Defense Contractor with Steady Dividends

General Dynamics, one of the top five U.S. defense suppliers, covers land, sea, and air military equipment, and also manufactures high-end business jets. Its military proportion is lower than Northrop Grumman’s, with a significant portion of revenue from civilian markets, making it less sensitive to defense cycle fluctuations. Historically, even during the 2008 financial crisis and COVID-19 pandemic, its profits experienced limited volatility. Its stable revenue base has enabled 32 consecutive years of dividend growth—one of only about 30 publicly listed U.S. companies to achieve this. Revenue breakdown: 25% civilian, 23% navy, 22% national security info, 18% weapons, 12% mission services. While growth is slower than high-tech firms, its long service life of aircraft and equipment, combined with cost control and share buybacks, makes it a resilient, well-guarded investment.

Boeing (BA): Military Power Amid Civilian Market Challenges

Boeing, the world’s largest commercial aircraft manufacturer (alongside Airbus), is also a major U.S. defense supplier, producing military aircraft like the B-52 bomber and Apache helicopters. Its stock decline mainly stems from severe setbacks in its civilian business. The 737 MAX series experienced two fatal crashes in 2018 and 2019, leading to worldwide grounding, compounded by pandemic impacts, which severely hurt profits. Additionally, new competitors, especially China’s commercial aircraft industry, are gaining market share and could challenge Boeing’s dominance. Looking ahead, Boeing’s military division is expected to grow steadily, but the outlook for its civilian segment remains uncertain. For defense stock investors, Boeing may serve better as a long-term hold or a dip-buying opportunity rather than a momentum chase.

Caterpillar (CAT): Equipment Maker with a Broader Defense Concept

Caterpillar is often categorized as a defense concept stock, but its defense-related revenue accounts for less than 30%. Its core business remains industrial equipment manufacturing, with performance mainly driven by global infrastructure investments and raw material demand. In other words, it straddles the line—part defense, part industrial. Similar companies include FedEx (involved in military logistics) and manufacturers of military water bottles and gear. Whether these are considered defense stocks depends on their customer base; if primarily serving defense agencies or government, they can be viewed as part of the defense concept.

Taiwan Defense-Related Stocks: Local Beneficiaries of Geopolitical Tensions

The Taiwan Strait situation has become a focal point of global geopolitics, with increasing defense budgets on both sides. Taiwan’s domestic defense industry is also poised to benefit.

Thunder Tiger (8033.TW): Beneficiary of the Rising Drone Market

Originally a remote-controlled model aircraft manufacturer for civilian toys, Thunder Tiger has successfully transitioned into a defense concept stock amid accelerating military drone applications. Since 2022, its stock has experienced a clear upward trend, with ongoing growth in military drone demand making it a long-term investment candidate.

Hanshyn (2634.TW): A Diversified Growth Player

Hanshyn operates similarly to Boeing, with both defense and civilian segments. Its civilian business focuses on aircraft maintenance and parts, while its military segment develops trainer aircraft. Recent orders have increased due to expanding drone markets and post-pandemic transportation recovery. Compared to Raytheon and Boeing, which face single-product challenges, Hanshyn’s diversified business offers more stability. Its maintenance and service revenues tend to rise with industry demand, making its stock performance relatively stable and attractive for investors.

Investment Logic for Defense Stocks: Why Is Now a Good Opportunity?

The investment rationale for defense stocks aligns with Warren Buffett’s classic framework: high-quality companies possess “moist snowballs” (growth potential), “long runways” (industry longevity), and “deep moats” (competitive advantages). The defense industry ticks all these boxes.

First, defense stocks offer an endless long runway. Human history is essentially a history of conflict; disputes never truly cease. Defense needs will always exist, making the industry’s growth path inherently long-term.

Second, defense stocks have the deepest industry moats. The advanced technologies they hold often represent the pinnacle of human R&D, as the most cutting-edge tech is first applied in national defense, with civilian tech lagging behind by years. High barriers to entry, trust built over decades, and proprietary patents create a formidable moat, making it difficult for competitors to dislodge leading firms.

Finally, geopolitical redistricting is accelerating, fueling growth in defense stocks. As globalization recedes, regional politics dominate, increasing war risks. The Trump administration’s “reshoring” policies have reinforced countries’ focus on domestic defense capabilities. This trend is expected to persist for a long time. With the likelihood of significant defense budget cuts being very low, the growth prospects for the defense industry remain robust.

Smart Strategies for Choosing Defense Stocks

While the overall outlook for defense stocks is positive, investment decisions require precision. The key is to accurately assess a company’s defense business proportion. Many firms are labeled as defense concept stocks but have minimal defense revenue, limiting their benefit from industry cycles. Equally important is evaluating the civilian business risks—as seen with Raytheon and Boeing, even stable military orders can be offset by difficulties in civilian markets.

Before investing, consider the company’s financial health, defense revenue share, industry trends, and geopolitical context. The good news is that defense firms generally face low risk of bankruptcy because their primary clients are governments, which tend to maintain long-term trust and support. This government backing further enhances the long-term value of defense stocks.

Ultimately, selecting high-quality defense stocks is not just about seeking returns but also about capturing global geopolitical dividends. In today’s era, the defense industry is at a historic growth juncture. Savvy investors should proactively identify and position themselves in this long-term, high-confidence opportunity.