For War and Markets: Profits out of Conflict

When I was a kid, my mom used to tell me:

“Steve, if you wanna make money in this world, you can count on people for 5 things and 5 things alone.

A) They will need food.
B) They will need money to pay for said food.
C) They will get sick.
D) They will get angry.
E) Then they will go to war.

Work in an industry that tailors to one of those 5 things and you will be fine.”

And this has proved to be the most true to true statement I have heard in a long time. The biggest industries in North America are Healthcare, Finance, Food and Military. Not to mention, in my lifetime of 30 ish years, I have seen 2 pandemics (COVID and Swin Flu), 1 pseudo-epidemic (SARS) and 4 wars (Afghanistan, Iraq, Ukraine and now Israel).

That is a lot going on in 30 years honestly.

Over this weekend, tensions rose in Israel and Israel is now at war. As such, aerospace and defence stocks are soaring (aside from BA of course), with LMT up roughly 8%, RTX 4%, Bombardier 2% and EADSY (airbus)… Well, its doing about as good as BA.

Because I am such an aerospace and defence enthusiast, I thought this would be the perfect time to talk about war, defence, exports and how these stocks behave.

Military Exports

The United States is the largest exporter of military goods with an estimated 246.8 Million in Export Value. The leading companies in the US for military exports are Lockheed Martin ( LMT ), Raytheon Technologies ( RTX ), General Dynamics ( GD ) and Northrop Grumman ( NOC ). In 2020, direct military sales revenue constituted around $124.3 billion. The major exporters of those goods were LMT , RTX , GD and $NOC.

In contrast, Canada, who is considered in the top 15 countries for military exports, grossed about $2.8 billion in military sales in 2021, predominately non-artillery military weapons and vehicles. Canada’s biggest military exporter is Bombardier ( BBD.B ). Canada’s largest recipient countries include the U.K., Australia, South Korea and United Arab Emirates (UAE). Also, Canada exports a lot of military supplies to China, but sketchily doesn’t disclose this in their official reports that I referenced in researching this article, I was only able to find out about this by looking at Bombardier’s sales and fiscal reports, where it exported multiple military jets and aviation supplies to the People’s Liberation Army Air Force. Oh Canada, you SKETCHY!


The largest recipients of US military supplies include Saudi Arabia (who is the largest consumer of both US and Canadian military supplies; also sketch, why you need so many military supplies Saudi Arabia? Whatcha’ll doin over there? Got some big plans I suspect.), Australia, South Korea, Japan and, of particular relevance, Israel.


What does it matter?

Well, it matters because these stocks tend to thrive and can actually prop markets up during times of war. Here are the 4 major military suppliers during the initial breakout of the War in
Afghanistan:


And at the breakout of the War in Iraq:


And the invasion of Ukraine:


And if we want to look at the Ukraine invasion overlaid with SPX:


You can see the market took a tumble while these spiked, similar to the setup today.
You will see that, for the most part, RTX tends to outdo the rest during times of conflict and war, except in the Ukraine instance where it kind of legged. So what gives?

Well, its important to understand what each of these companies do and what they offer. Not all war and conflict is the same. During the Iraq war, the US used a lot of Ariel weapons, which is Raytheon’s speciality. The needs of Ukraine were mostly infantry and vehicle supplies at first, which is more General Dynamics area. But let’s go over, very briefly, what each of these companies provide in a general sense. This will help if you have an interest in investing:

Raytheon RTX

• Missile systems including missile guidance
  
• Electronic warfare systems
  
• Cyber security stems
  
• Radar
  

Lockheed Martin LMT

• Fighter jets and military helicopters
  
• Missile defense systems
  
• Space systems
  
• Artificial intelligence and quantum computing for military and defence applications (a very promising and key component for the future of ABM technology, or Anti-ballistic Missile technology).
  

General Dynamics GD

• Jets,
  
• Nuclear Powered Submarines,
  
• Arleigh Burke-class guided-missile destroyers,
  
• Abrams tanks
  
• Stryker Armoured fighting vehicles
  

Northrop Grumman Corp NOC

• Combat avionics
  
• Surveillance systems
  
• Computer systems
  
• Air combat systems
  
• Electronic warfare systems
  
• Battlefield management systems
  
• Ships and nuclear powered submarines
  
• Aircraft carriers
  

Raytheon, General Dynamics and Northrop all have facilities and offices in both Canada and the US, which is why Canada ranks in the top 15 of military exports and why these 4 companies are the most major exporters of military supplies.

Concluding remarks:
So if you are in the market to profit from this Israeli situation (I know it sounds sick saying that but you know how life is), its important to look at the military needs of Israel and which company is likely going to serve it best. The reality is, all are going to do well because, while each company has its own niche, they complement each other. RTX guidance systems control LMT’s missiles which makes parts of GD’s aerial defence systems, etc. Inversely, you can just invest in ITA (the aerospace and defence ETF) which has holdings in most of these companies.


It has a leveraged share counterpart, DFEN , which is something that I have just bought into today 😊.

Anyway, that's it! Hopefully you found this information helpful.
As always, safe trades everyone!