The Russia-Ukraine conflict is changing the conversation around investing in the business of defense.
Why it matters: Defense contractors are polarizing, and often take heat for profiting from armed conflicts. But Eastern Europe's turmoil underscores the dirty but necessary work of waging war and appears to be thawing investor attitudes toward the sector.
- Case in point: At least one investment firm that previously avoided weapons companies is loosening restrictions in direct response to Russia’s aggression, as the WSJ reported.
Catch up fast: Western governments are shipping equipment to Ukraine en masse, and weapons manufacturers are immediate beneficiaries.
- The Biden administration is weighing a new round of aid worth $500 million. Absent a firm pullback from Russia, governments intend to surge more hardware into Ukraine.
- Investors are taking note, with Raytheon, AeroVironment and Lockheed all handily beating the broader market year to date.
What they’re saying: Behind the paradigm shift is “high demand for land-based weapons” like the drones, missiles and fighter jets manufactured by those three companies, according to a recent research note by CFRA.
- “U.S. allies witnessing the war in Ukraine are likely to step up defense spending in the coming years to deter future aggression, providing another avenue for U.S. defense firms to grow revenues,” CFRA analysts wrote.
What to watch: Whether Russia commits to de-escalating (or pulls off a victory), which would curb the immediate flow of weapons into Ukraine.