The aerospace and defense industry has been a beacon of strength in a volatile market. The ongoing Russia-Ukraine war and conflicts in the Middle East have boosted the sector, propelling two industry giants, Lockheed Martin and Raytheon Technologies, to near their 52-week highs. But with their stocks soaring, investors are asking: Should they jump in now, or wait for a pullback?
Lockheed Martin: A Strong Performer with Potential for a Correction
Lockheed Martin, the largest U.S. defense contractor, is a consistent performer. The company operates across four segments: aeronautics, missiles and fire control, rotary and mission systems, and space. Lockheed’s stock has surged 34% this year, driven by strong earnings and positive market sentiment. The company recently posted an EPS of $7.11, exceeding expectations for the third consecutive quarter, and revenue grew by 8.6% year-over-year. Analysts predict further growth, with earnings projected to rise by 8.26%. Lockheed’s dividend yield of 2.17% and its steady dividend growth add to its appeal.
However, technical indicators suggest caution. The stock’s RSI, a measure of its momentum, is approaching 80, indicating overbought conditions. The stock is also trading significantly above its 50-day moving average, which can be a signal of a potential correction. While RBC recently raised its price target, the consensus price target suggests a slight downside. For long-term investors, waiting for a dip closer to its 50-day moving average might offer a more attractive entry point.
Raytheon Technologies: Strong Fundamentals, but Valuation is a Concern
Raytheon Technologies, another defense giant, has also seen its stock soar this year, up 47%. The company provides advanced systems and services for commercial and military clients. Raytheon has consistently outperformed expectations, with its most recent earnings report showing an EPS of $1.41, surpassing the consensus estimate by $0.11. Revenue also rose 7.7% year-over-year. Looking ahead, analysts expect further upside for the stock.
However, while the stock’s momentum is undeniable, its valuation is becoming a concern. Raytheon’s P/E ratio sits at a lofty 71.45, significantly exceeding that of Lockheed Martin (5.47). The stock is also trading at a stretched level above its 200-day moving average. This suggests that the risk-reward ratio may not be favorable for investors looking to buy at current levels for the long run. Nevertheless, Raytheon’s forward P/E of 20 indicates potential for long-term growth, particularly if the stock returns to a more favorable level. With its strong fundamentals and consistent earnings performance, a pullback could provide an excellent opportunity to initiate or add to a position.
Patience is Key
Both Lockheed Martin and Raytheon Technologies are flying high due to strong earnings, geopolitical factors, and positive market sentiment. But with their stocks trading near all-time highs and indicators suggesting overbought conditions, investors may want to wait for a pullback to improve the risk-reward ratio. While both stocks are fundamentally solid and poised for long-term growth, chasing them at current levels could expose investors to short-term downside risk. When the market eventually cools down, these two defense giants could offer a compelling buying opportunity for patient investors.
