From Geopolitics to Moats: Reexamining the Investment Logic of Defense Industry Stocks

Today’s world is characterized by diverse conflicts, and the pace of military technology iteration has never been faster. The rise of drones, precision missiles, and information warfare has made military spending a common choice among countries worldwide. This not only reshapes the nature of warfare but also creates a unique investment track. However, not all companies labeled as “defense” stocks are worth关注— the key lies in how to identify them.

What Is a True Defense Stock

In a broad sense, defense stocks encompass any company with direct or indirect dealings with the Department of Defense. From large weapon systems to everyday military supplies, the boundaries are extremely wide. But investors need to understand that only companies with a sufficiently high proportion of revenue from defense can truly enjoy the industry’s benefits.

Take Caterpillar(CAT) as an example. Although often classified as a defense stock, less than 30% of its revenue comes from military sectors; the majority is still industrial equipment. Similarly, FedEx(FedEx) once contracted military logistics but is labeled as a defense concept stock. The stock performance of these companies ultimately depends on the health cycle of their civilian markets, not military demand.

In contrast, companies like Boeing and Raytheon, which operate in both military and civilian sectors, tend to have more complex risks. Their military orders may grow steadily, but any fluctuations in the civilian market can lead to significant declines in overall performance and stock prices.

The Differentiation of U.S. Defense Giants

Lockheed Martin: A Stable Long-term Choice

Lockheed Martin(LMT) is the second-largest global defense manufacturer, with a highly focused business. Its stock price has shown a steady upward trend since listing, with short-term corrections mainly reflecting broader market adjustments rather than company-specific issues. From a long-term holding perspective, its advantage as a pure defense company is clear.

Northrop Grumman: Deepest Technological Moat

Northrop(NOC) ranks fourth globally but is the largest radar manufacturer, with highly specialized expertise. The company has increased dividends for 18 consecutive years and accelerated its $500 million share buyback plan this year. Its technology is applied in space, missiles, and communications, aligning closely with U.S. strategic deterrence development. As long as global geopolitical tensions remain vigilant, defense spending will be hard to stop, and Northrop’s growth momentum is relatively certain.

General Dynamics: Deep Moat but Limited Growth

General Dynamics(GD) is one of the top five U.S. defense suppliers, with 32 years of consecutive dividend growth— a rare achievement among only 30 U.S. companies. Its civilian segment(Gulfstream jets) serves high-end clients and is unaffected by economic cycles, maintaining stable overall revenue. Although revenue growth lacks standout features, cost control and share repurchases help sustain shareholder returns, demonstrating a deep moat.

Raytheon and Boeing: Civilian Market Challenges Drag Down Overall Performance

Raytheon(RTX) has performed weakly this year, mainly due to defects in parts supplied for Airbus A320neo aircraft— using rare powder metals in high-pressure environments that could cause engine failures. This results in about 350 aircraft annually needing re-inspection, with repair times reaching 300 days. While military orders remain stable, litigation risks and customer attrition in the civilian sector are eroding profits.

Boeing(BA) faces similar difficulties. Besides the 737 MAX safety incidents and pandemic impacts, its civilian market faces competition from China’s C919(C919). The emergence of this new competitor breaks Boeing’s decades-long monopoly. From an investment perspective, Boeing’s military business(B-52 bombers, Apache helicopters) is expected to grow steadily, but the outlook for civilian markets is uncertain, making it more suitable for bottom-fishing rather than chasing rallies.

Local Opportunities in Taiwan Defense Stocks

The tense geopolitical situation in the Taiwan Strait has driven increased regional military expenditure. Both Taiwan and China have raised their defense budgets over the past two years.

Thunder Tiger(8033.TW), which transformed from a remote-controlled toy manufacturer into a drone producer, saw a significant surge in stock price in 2022, benefiting from explosive growth in military drone demand.

Hansung(2634.TW) has a more diversified business structure, with civilian segments engaged in maintenance and parts sales, and military segments focused on trainer aircraft. Compared to companies relying on a single brand, Hansung’s stable demand from the maintenance market helps its stock perform relatively resiliently, offering a higher safety margin.

Why Defense Stocks Are Worth Attention: Buffett’s Three-Layer Logic

The core reason to invest in defense stocks can be explained by Buffett’s “wet snow” theory— requiring a long enough track, a deep moat, and a “wet snowball.” Defense stocks happen to meet all three.

First, the track is long enough. Human civilization has never ceased conflicts. The demand for armies is an industry trait with an eternal lifespan, ensuring an ultra-long cycle.

Second, the moat is extremely deep. Defense technology generally leads civilian tech, related to national security, with very high entry barriers. Trust takes years to build, contracts are tight, and competitors find it hard to cross. Many companies share patents with countries or have exclusive supply agreements, reinforcing the irreplaceability of leading firms.

Third, the snowball is wet enough. Global geopolitical trends are regionalizing, with countries increasing military spending. Disarmament risks are currently very low, and growth momentum is relatively certain.

Practical Framework for Investment Decisions

While the potential of defense stocks is undeniable, actual investing should follow four principles:

First, focus on the proportion of defense revenue. The share of military business determines whether a company can truly benefit from increased defense spending. Companies with less than 50% revenue from defense often see their civilian business as the main driver.

Second, monitor civilian market changes. Even if military orders increase, a decline in the civilian sector can offset or even surpass military gains. The stories of Boeing and Raytheon illustrate this well.

Third, assess technological leadership. In this industry, technological moat determines long-term competitiveness. Northrop and Lockheed Martin are worth关注 precisely because of their technological advantages that are hard to shake.

Fourth, consider geopolitical risks. Defense spending is ultimately driven by political decisions, and changes in international relations can bring unexpected shocks.

Summary: Selective Rather Than Blind Investment

The demand stability of defense stocks is unquestionable, but the answer to “which defense stocks” is far more complex than a simple list. True investment opportunities lie in companies with high defense revenue proportions, stable civilian or zero civilian business, and deep technological moats.

Companies like Northrop Grumman, Lockheed Martin, and Hansung demonstrate different investment traits through their competitive advantages and market positioning. Meanwhile, Boeing, Raytheon, and similar cross-sector firms remind investors not to overlook risks in the civilian market.

Defense stocks are not simply “buy defense and they will rise.” They require a deep understanding of corporate structure, market dynamics, and geopolitical risks. Only by comprehensively evaluating financial health, revenue structure, technological standing, and global political environment can one make wise long-term decisions.