The world is in a constant state of turmoil. Geopolitical tensions are escalating, leading to full-blown wars in certain world regions. While such tensions are dealbreakers for several industries, the aerospace and defense sector runs on a different model. Ironically, increasing geopolitical tensions are one of the most positive signs of profitability for these companies.
One of the critical drivers of revenue for such companies is government contracts for military-grade weapons, aircraft, and defense systems. The increased risk of war boosts defense spending, landing aerospace and defense companies more contracts. With defense stocks soaring after Iran’s recent missile attacks on Israel, investors are wondering if this is an overreaction to the ongoing conflict.
Scott Ladner, Chief Investment Officer at Horizon Investments, joined CNBC on October 2nd to discuss tensions in the Middle East and defense stocks. He sees potential in small caps and cyclical sectors if the economy cools. He said that although investors shouldn’t do anything in terms of the port strike stuff, it was too early to predict things related to the conflict in the Middle East.
The market tends to look through it very well when we look at the conflicts that have arisen in the region in the past. However, since Iran’s recent missile attacks on Israel seem more serious, the situation needs to be watched carefully. Despite that, Ladner says that he is optimistic at the present and believes they will find a way through the situation.
He is also of the view that the world is not getting any safer, with more money being put aside for defense. Apart from the situation in the Middle East, special threats from China and Taiwan, although not an urgent concern, also require careful attention. These circumstances make investing in defense stocks a reasonable choice in the present.
Sheila Kahyaoglu, a Jefferies defense analyst, joined CNBC’s ‘The Exchange’ on October 1 and said that the base case for US defense spending is in the 3-5% range. She also said that certain stocks in the defense sector have a potentially high revenue upside due to the events unfolding across the world.
Growth in Aircraft Orders
While sharing his insights on commercial aviation at the Morningstar Investment Conference in Chicago on June 26, Tony Bancroft from Gabelli Funds said he had noticed significant growth in aircraft orders, with both Boeing and Airbus holding a 12-year backlog of orders. He listed three reasons for this growth. The first catalyst, according to his perception, was China. China accounts for around 20% of the growth in orders to cater to the growing middle class in both India and China. This middle class has an increased inclination for travel.
Secondly, business travel has bounced back to pre-pandemic levels of 2019, marking another critical factor for this growth. Bancroft highlighted the rising middle class in the US and the world to be the third factor. This middle class is growing air travel and contributing positively to economic growth in the industry.
Trends in the Aerospace and Defense Industry
The aerospace and defense (A&D) industry experienced a revival in product demand in 2023. According to a report by Deloitte, domestic commercial aviation revenue passenger kilometers in the aerospace sector exceeded prepandemic levels in most countries. The increase in air travel has prompted an increased demand for new aircraft and aftermarket services and products across the globe.
The demand for weapons and next-generation capabilities in the US defense sector drove solid demand in 2023, primarily due to the ongoing geopolitical conditions and the prioritization of modernizing the military. This growing demand for A&D products is expected to continue throughout 2024.
Our Methodology
To list the 10 Worst Aerospace Stocks To Buy According to Short Sellers, we used the Finviz screener, ETFs, and rankings to first identify 30 Aerospace stocks. Next, we narrowed our list by selecting the 10 stocks that have high short interest but also a high number of hedge fund investors. Finally, these stocks were ranked in ascending order of their short interest. We have also added the number of hedge funds holding each stock as a secondary metric.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Worst Aerospace Stocks To Buy According to Short Sellers
Triumph Group (NYSE:TGI) serves the global aviation industry. It designs, manufactures, engineers, repairs, and overhauls a portfolio of aerospace and defense components, systems, subsystems, and structures. It also serves original equipment manufacturers (OEMs) and military and commercial aircraft operators through the aircraft life cycle. Triumph Group operates through two segments: Triumph Systems & Support and Triumph Interiors.
Triumph Systems & Support designs, develops, and supports proprietary components, systems, and subsystems. It also provides full life cycle solutions for regional, commercial, and military aircraft, while also producing complex assemblies using external designs. Triumph Interiors, in contrast, supplies business, commercial, regional, and military manufacturers with insulation parts and interior and composite components to Triumph and customer designs. It also encompasses environmental control system ducting, the manufacture of thermo-acoustic insulation, and other aircraft interior components for aerospace OEMs.
Triumph Group (NYSE:TGI) started 2024 on a positive note, and expects continued improvement throughout 2025 into seasonally stronger quarters. Its revenue grew by 7% to $281 million, translating to an additional $17 million. It retired an additional $120 million of debt, strengthening its balance sheet. The company recently received rating upgrades from both S&P and Moody’s.
The company is benefiting from a rising average fleet age, with its aftermarket sales growing 27% year over year. The need to fly older aircraft due to the shortage of new aircraft and the emergent 787 landing gear overhaul cycle are also important factors. In addition, the continual rise in repairs and spares on key platforms is benefitting the company’s sales mix and financials. These include the Boeing 737 and Airbus A320 fleet and the Boeing 787 and Airbus A380 wide-body fleets.
Overall, Triumph (NYSE:TGI) is on track to achieve its annual net sales, cash flow guidance, and adjusted EBITDA. It is well-positioned to capitalize on the strong aftermarket demand in the short term and the higher OEM build rates over the coming 18 months.
Overall, TGI ranks 3rd among the 10 worst aerospace stocks to buy now according to short sellers. While we acknowledge the potential of TGI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TGI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
