4 Defense Sector Stocks Offering Safety And Growth

Market volatility is back. And it didn’t take long.

From the low of the year set on July 24, the CBOE Volatility Index — also known as the Fear Index or simply the VIX — doubled less than two weeks later, rallying on August 5 to levels not seen since early January. Of course, by the end of the week, stocks recovered about half of their Monday losses (and ended the week 2.8% down). The volatility, accordingly, let up a little. Still, at about 66.5 on Friday, the VIX stood about 40% higher than the July lows, and it has continued to move higher again early this week.

Here’s another way of looking at volatility: over the past two weeks, major indices such as the S&P 500 were posting relatively large moves — up or down 1% or more — every day. This is the longest such streak in years and, by some calculations, since the Great Recession.

This looks like a great time to look for some defense. And coincidentally, I think investors may find it in the defense sector. While stocks officially classified as Aerospace and Defense might not be immune from the market’s volatility, these companies are generally less dependent on international trade and even on overall economic growth and, thus, are often considered ports in macro-economic storms.

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Many of these stocks also pay dividends — another plus for the group as a whole.

Of course, I’m not primarily concerned with dividends… what I’m looking for in a stock is growth. The good news is that the aerospace and defense sector has lots of that as well. Moreover, many of these stocks are cash-rich — a factor not to be ignored in any market (and that becomes increasingly important in the type of volatile market that we see today).

Let’s Play Defense In The Defense Sector
This is why I set out to search for growing and cash-rich companies within the sector. I came up with a watch list of the top four favorites, containing companies whose most recent year-over-year revenue and net income growth were higher than 15%.

FTM stock screen

1. AeroVironment (Nasdaq: AVAV) sits atop the list. At the end of its fiscal 2019 (April 30), AeroVironment held about $332.6 million in cash and equivalents on its balance sheet, an increase of $34.8 million from a year earlier and representing more than a quarter of its total market cap. As a result, AVAV is financially secure — and might even become an acquisition target.

AVAV is an unmanned aircraft systems (UAS, also known as drones) specialist. The company is the largest supplier of small drones to the Pentagon and to dozens of allied nations. Profitable and the owner of more than 200 U.S. patents, this unmanned technology leader remains a favorite.

#-ad_banner-#​2. With more than 9% of its market cap in cash, Axxon Enterprises (Nasdaq: AAXN) is an aerospace and defense company best known for its TASER division.

This is a company on a mission: to reduce the impacts of bullets in law enforcement. While Taser is still a weapon, its impact is typically less than that of a gun, having saved two hundred thousand lives from death or serious injury, according to the company. With 600 patents — and exposure to 17,000 out of 18,000 U.S. police departments — Axxon has firmly established itself as a leading law-enforcement enterprise.

Further, over the years, Axxon has leveraged its relationships to other business areas, such as body cameras and data. Axxon has been investing in software for years and now stores public safety data on its cloud. In the next six to twelve months, Axxon plans to launch its record-management system and computer-aided dispatch software.

Profitable and growing, AXXN is another favorite from today’s watch list.

3. Despite having only 10 million in cash and equivalents on its balance sheet (about 3% of the total market cap), ShotSpotter (Nasdaq: SSTI) should not be overlooked. 

Founded in 1996 and public since June 2017, this aerospace and defense company provides gunshot detection services for law enforcement officials and security personnel. These products, which include the flagship ShotSpotter Flex, the leading gunshot detection, location and forensic analysis system installed in over 100 cities, help authorities to identify, locate, and respond to gun violence, and are available by subscription.

This is expected to be the first year of profitability for SSTI. The stock has outperformed the S&P 500 by 50% over the last two years (despite falling by 30% in the last year). The stock, a law enforcement innovator, looks interesting at its current levels.

4. General Dynamics (NYSE: GD) is a leading U.S. defense contractor. This company, which has been in business for more than 60 years (founded in 1952), is well-known and has its stake in many defense-related areas, from aerospace to combat.

Yielding 2.2%, GD is one of those “defensive” stocks that often see investor interest in times of uncertainty thanks to its strong financial and operational position as well as its steady business. And because it’s able to grow its earnings by 9% a year or better (and with a low payout ratio of 36%), it’s reasonable to expect GD to continue its 21-year streak of growing its dividend.

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