Overview of the U.S. Defense Industry: Six Major Investment Opportunities Based on Defense Needs

As the global geopolitical landscape shifts, regional conflicts are increasing in frequency, and the role of military technology is becoming more critical. The defense budgets of the United States and countries worldwide are rising year after year, leading to structural growth opportunities in the defense industry. This article provides an in-depth analysis of the U.S. defense stocks market, revealing this strategically driven sector influenced by dynamic geopolitics to investors.

Escalating Conflicts Drive Technological Defense Transformation

In the past, regional conflicts relied heavily on manpower and traditional tactics. Today’s warfare has transformed dramatically, with drones, precision missiles, information warfare, and cyber defense becoming decisive factors on the modern battlefield. The evolution of technological warfare is driving a structural increase in global military spending.

Governments recognize that investing in cutting-edge defense technology can achieve greater security with less manpower. In an era of declining birth rates, replacing personnel with technology has become a strategic choice for many nations. Additionally, from a national security perspective, no country wants to fall behind in military technology, creating a long-term and stable defense expenditure momentum.

The definition of defense stocks is quite broad, encompassing everything from large weapon systems to military supplies such as water bottles and uniforms—any company providing products or services to the military can be classified as a defense concept stock. However, investors should distinguish between “pure defense” companies and “semi-military, semi-civilian” firms, as this directly impacts how much they can benefit from increased defense spending.

Three Core Evaluation Metrics for Defense Stock Investment

Before investing in U.S. defense stocks, investors must understand three critical evaluation dimensions.

The first is the proportion of revenue derived from defense. Lockheed Martin (LMT) and Raytheon (RTX) are pure defense contractors, with over 80% of their revenue coming from U.S. government defense contracts, making them most directly affected by changes in defense policies. In contrast, Boeing, General Dynamics, and Caterpillar are mixed companies with both military and civilian businesses, and their stock prices are more susceptible to the health of the civilian market.

The second is the forward-looking market demand. As warfare evolves, demand for ground troops may plateau, but the need for high-tech weapons systems in the Air Force and Navy continues to grow. Investors should track which weapon platforms are entering upgrade cycles rather than following past procurement trends.

The third is the company’s technological moat and trust barriers. The defense industry has extremely high entry barriers. Defense contracts involve strict security reviews, and establishing trust with government agencies takes years. Once a company secures a supplier position, it is difficult to displace. This structural advantage allows market leaders to maintain long-term competitive positions.

The Ecosystem of the Six Major U.S. Defense Giants

1. Lockheed Martin (LMT): The Absolute Leader in Defense Industry

As the world’s largest defense contractor, Lockheed Martin’s main products include advanced fighter jets, helicopters, and missile systems. Iconic products such as the F-35, F-16, C-130 transport aircraft, and Black Hawk helicopters are all from its portfolio. The battlefield performance of drones in the Russia-Ukraine conflict highlights the value of precision strike systems, leading to increased orders.

Long-term charts show Lockheed Martin’s stock price trending steadily upward. Price corrections are mainly driven by broader market adjustments rather than deteriorating fundamentals. Its stable cash flow, consistent dividend growth, and industry leadership make it one of the most defensive long-term holdings in the defense sector.

2. Raytheon Technologies (RTX): Facing Challenges as a Defense Supplier

Raytheon is the second-largest U.S. defense contractor, producing products like the AIM-9 Sidewinder missile, Patriot missile system, and Tomahawk cruise missile. However, its recent stock performance has been weak, mainly due to systemic issues in its commercial aerospace segment.

Its subsidiary Pratt & Whitney supplies engines for Airbus A320neo aircraft, but recent powder metallurgy defects in PW1100G-JM engines have caused potential high-stress part failures. This quality issue has led to a surge in maintenance and inspection demands, with repair cycles exceeding 300 days. Litigation risks and customer attrition threaten its performance.

While military orders remain stable and growing, the crisis in the civil aviation sector has offset defense revenues. Investors should closely monitor maintenance progress and legal resolutions rather than solely focusing on defense order growth. Currently, the stock is more suitable for observation than active investment.

3. Northrop Grumman (NOC): A Tech Monopoly for Strategic Deterrence

Northrop Grumman is the fourth-largest defense contractor globally and the largest radar manufacturer. It is a distinctly “pure defense” company with stable profits and over 18 years of consecutive dividend increases.

Its technological monopoly is significant. For example, stealth bombers are only produced by U.S. companies, creating an insurmountable competitive barrier. The company’s R&D focuses on “strategic deterrence”—using preemptive force to dissuade adversaries—covering space defense, long-range missiles, and strategic communications.

The Russia-Ukraine conflict underscores the importance of nuclear deterrence and long-range strike capabilities, prompting the U.S., Russia, and China to upgrade their nuclear arsenals. Northrop’s GBSD intercontinental missile project and B-21 bomber are core pillars of U.S. modernization efforts. Over the next decade, strategic deterrence and space defense will be key investment areas. As long as global defense risks remain high, demand for Northrop’s products will not decline. Its deep technological moat makes it one of the most promising long-term defense stocks.

4. General Dynamics (GD): A Defensive Cash Cow

General Dynamics is a major U.S. defense supplier serving all three military branches, producing military vehicles, submarines, and related systems. Its civilian business includes Gulfstream jets for high-net-worth clients.

While its defense revenue share is less than 30%, its diversified customer base—wealthy individuals and government agencies—ensures stable performance. Historical data shows profits remained steady during the 2008 financial crisis and COVID-19 pandemic, unaffected by macro shocks.

Revenue breakdown: 25% civilian, 23% Navy, 22% national security info, 18% weapons, 12% mission services. This diversification reduces policy impact risks. The company is shareholder-friendly, regularly repurchasing stock to protect value. With over 32 years of consecutive dividend increases, it is one of only 30 U.S. companies with such a record. Its stable moat makes it suitable as a defensive allocation within the defense sector.

5. Boeing (BA): Civilian Challenges Weigh on Military Potential

Boeing is one of the world’s two major commercial aircraft manufacturers and also a top five U.S. defense contractor, producing iconic military aircraft like the B-52 and Apache helicopter.

However, its stock plunged mainly due to issues in its civilian business. The 737 MAX suffered two fatal crashes in 2018-2019 and was globally grounded, compounded by pandemic impacts. Long-term threats include rising competition; Boeing’s market dominance, historically supported by European and American subsidies, is eroding. China’s COMAC is gaining support and could capture a share of the global market.

From an investment perspective, Boeing’s defense orders are expected to remain stable, but the long-term outlook for its civilian segment is uncertain. It’s more suitable for buying on dips rather than chasing high prices.

6. Caterpillar (CAT): Blurred Lines in Industrial Cycles

Caterpillar manufactures heavy machinery—agriculture, mining, engines—and also supplies naval engines. Defense-related revenue accounts for less than 30%, with core business still industrial equipment.

Its revenue growth has been driven by demand in China, where infrastructure investments aim to counteract economic slowdown, and post-disaster reconstruction. Its performance depends more on global infrastructure spending and commodity cycles than on defense budgets, making it an outlier among defense concept stocks. Investment logic should follow industrial cycle trends rather than pure defense growth.

Valuing Defense Stocks Through Buffett’s Moat Theory

Buffett emphasizes three elements: a long runway, a deep moat, and a “wet snowball.” U.S. defense stocks excel in all three.

Industry’s eternal runway: Human conflict persists despite technological progress, ensuring long-term growth driven by structural rather than cyclical factors.

Fortress of moat: Defense technologies often lead civilian innovations, with cutting-edge research first applied militarily. High barriers to entry and trust-building over years make established leaders nearly irreplaceable.

Wet snowball: As geopolitical tensions become regionalized and unilateralism rises, countries increase military spending to address security threats—this trend is unlikely to reverse soon. Major declines are mainly due to disarmament policies, which are currently unlikely, making growth prospects stable.

Investment Framework for U.S. Defense Stocks

For investors aiming to allocate to U.S. defense stocks, key decision points include:

• Analyze defense revenue proportion: The same increase in defense spending benefits Lockheed Martin and Boeing differently. Pure defense firms benefit fully, while mixed companies’ gains may be offset by civilian sector downturns.

• Monitor civilian business trends: Cases like Raytheon and Boeing show that even strong defense fundamentals can be undermined by systemic issues in civilian markets. Keep an eye on market conditions and competition in civilian segments.

• Assess technological moat depth: Northrop’s dominance in stealth and radar tech exemplifies how core technological advantages provide resilience against budget fluctuations.

• Adopt a long-term perspective: Defense stocks generate value through sustained cash flow and dividends, not short-term price swings. Long-term holders like General Dynamics and Northrop have achieved stable compounded returns, underscoring the core investment value.

Conclusion

U.S. defense stocks represent not only traditional defense industries but also strategic assets amid today’s geopolitical competition. Most countries remain concerned about their national security, continuously investing in military technology even without active conflicts.

Success in investing in U.S. defense stocks hinges on selecting true beneficiaries. Pure defense companies can fully capitalize on defense budget growth, while mixed firms require case-by-case evaluation, as civilian sector declines may offset military gains.

Overall, companies with strong technological moats and high defense revenue shares are worth long-term focus. However, investors must consider financial health, industry trends, geopolitical shifts, and civilian business prospects to make informed allocation decisions.