Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How Lockheed Martin and Defense Stocks Cash In on Global Tension
Transcript
- Lucas: So the S&P 500 is down about 0.7 percent over the past five days, and the Nasdaq has dropped one and a half. But there's a pocket of the market that's ripping higher. Defense stocks. Luna: Yeah, I saw CNBC's headline this morning: 'Shortsighted stock market can no longer brush off war: It's too hard to ignore $100 oil.' That's a pretty blunt framing. Lucas: It is. And it's interesting because for months, the market has essentially shrugged off geopolitical escalations. A missile test here, a conflict flare-up there — the VIX would blip and then settle. But now, with crude above $100 and headlines about an expanding conflict, the reaction is different. Luna: The VIX is at 18.91, so it's elevated but not panicked. But the VVIX — the volatility of volatility — is at 102.87. That's a signal that options traders are pricing in bigger swings ahead. The defense sector seems to be the clearest beneficiary. Lucas: Exactly. And the poster child this week is Lockheed Martin. They reported earnings and revenue that beat expectations, and they raised their full-year guidance. The stock is up about 4 percent in the last few days. But the real story is their backlog — over $160 billion. That's years of contracted revenue. Luna: That backlog number is staggering. It means even if tensions de-escalate tomorrow, Lockheed is still building F-35s and missile systems for the next five years. The defense cycle is very long. Lucas: Right. And that's what investors are latching onto. It's not just about the current quarter; it's about the structural shift in global military spending. NATO countries have committed to raising defense budgets to 2 percent of GDP and beyond. The US defense budget is growing. Japan is rebuilding its military. This is a multiyear trend. Luna: But let's talk about the other side. When you see headlines like 'Lockheed Martin surges on war fears,' it feels a bit uncomfortable. And it raises the question: is it too late to buy? Defense stocks are already up a lot this year. Lucas: That's the classic tension. The sector trades at a premium during active conflicts, but if peace breaks out, the stocks can drop quickly. Look at the post-Cold War period — the so-called 'peace dividend' saw defense stocks underperform for years. Luna: So is this a momentum trade or a long-term hold? Lucas: I think the case for long-term is actually stronger now than it was in the 1990s. Back then, the Soviet Union collapsed and there was a genuine reduction in threat perception. Today, we have multiple active conflicts, a rising China, and a general sense that the world is less stable. The defense spending cycle is more durable. Luna: But won't higher oil prices eventually hurt the broader economy? GDP growth is only 2.1 percent annualized. If oil stays above $100, that's a tax on consumers and businesses. Could that drag down even defense stocks if the market tanks? Lucas: It's possible. Defense stocks aren't immune to a broad recession. But they have historically been defensive — pun intended — because government spending is counter-cyclical. When the economy weakens, defense budgets often hold up or even increase, since national security is a priority. So relative to other sectors, they tend to outperform in downturns. Luna: That's a good point. But let's get specific. Beyond Lockheed, what other names are worth looking at? Lucas: Northrop Grumman is another major player, especially in space and missile defense. General Dynamics has a big shipbuilding business that's benefiting from Navy modernization. And then there's the supply chain — companies like L3Harris and RTX, formerly Raytheon, that provide components and electronic systems. Luna: And there are ETFs too, like the iShares US Aerospace & Defense ETF, ticker I-T-A. That's a way to get diversified exposure without picking single stocks. Lucas: Exactly. And speaking of diversification — this is a good moment to mention something about how we run this show. We don't take advertising. No sponsor spots, no annoying mid-roll ads. We keep it that way because we want the conversation to be clean and focused on what matters to you. Luna: Yeah, and if you find value in these episodes — if one of these angles has helped you think about a trade or an investment differently — there's a simple way to support that choice. It's buy me a coffee dot com slash fexingo. No pressure, just a link if you want to help keep the lights on. Lucas: It's genuinely appreciated. Now, back to the defense sector — one thing I want to highlight is the earnings quality. Lockheed's free cash flow was strong this quarter, and they're using it to buy back shares and raise dividends. That's a sign that the business is generating real cash, not just booking revenue. Luna: That's important because sometimes defense stocks can look cheap on a price to earnings basis but have lumpy cash flows due to contract timing. Lockheed seems to be smoothing that out. Lucas: Right. And the other angle is international sales. The US is the biggest buyer, but Lockheed is selling F-35s to allies all over the world. Those international contracts often have higher margins. So the backlog isn't just big — it's profitable. Luna: But what about the risk of export restrictions? If the US government decides to limit sales to certain countries, that could hit revenue. Lucas: It's a risk, but historically, the US has been very supportive of defense exports. It's a tool of foreign policy and economic strength. So I don't see that changing dramatically unless there's a major shift in administration policy. Luna: So bottom line: you're constructive on defense, but cautious on entry price? Lucas: I'd say yes. The trend is your friend, but valuations are elevated. The S&P 500 is trading at about 21 times earnings, and defense stocks are in that range or a bit higher. If you're a long-term investor, dollar-cost averaging into an ETF like ITA makes sense. If you're a trader, wait for a pullback. Luna: And keep an eye on oil. If crude drops back below $90, some of the geopolitical premium might come out of these stocks. But if it stays above $100, defense could keep running. Lucas: That's the million-dollar question — or the hundred dollar barrel question. We'll be watching.