Weapons of Wealth
In this edition of the Smart Investor newsletter, we examine the stock of the world’s largest defense contractor. We are not selling any stocks today due to the ongoing market turbulence. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ Market & Portfolio Update: Last week saw the worst stock declines in years, and this week appears to be continuing the downward trend across market sectors as investors grow increasingly concerned about the economy’s health. President Donald Trump added fuel to the fire, stating that the economy faces “a period of transition” and refusing to outright rule out the possibility of a recession. With analysts and economists raising red flags, markets seem to have made up their minds – and the outlook isn’t pretty.
In the previous Smart Investor edition, we predicted continued market volatility and warned of a significant correction, possibly even a bear market. Watching your portfolio turn red is never easy, but long-term investors understand that market declines are a natural part of the cycle. While many sell in fear, we see downturns as fertile ground for buying opportunities – ones that can generate substantial gains for patient investors when the cycle turns upward again.
Although some portfolio adjustments may be warranted, at Smart Investor, we do not base our “buy” and “sell” decisions on short-term market swings, except where price considerations come into play. We remain committed to quality businesses with strong earnings growth potential. That said, given current conditions, we believe investors should favor defensive sectors while also considering select stocks from other industries that can thrive due to their unique strategic positioning.
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❖ Broadcom (AVGO) reported quarterly earnings that far exceeded analyst expectations, driven by strong AI-related revenue growth in both semiconductor solutions and infrastructure software. The AI stalwart issued upbeat guidance that outpaced Wall Street forecasts, saying it expects continued strength in AI revenue as hyperscalers ramp up their capex.
Despite AVGO’s recent stock declines – in line with the broad downturn in the AI trades – analysts are increasingly optimistic, with some saying that the company’s AI revenue could double by 2027. Several Wall Street brokerages have lifted Broadcom’s price targets, reiterating their “Buy” ratings and saying that price decrease is a notable opportunity to buy the dip.
❖ Hewlett Packard Enterprise (HPE) saw its stock plunge despite reporting better-than-expected fiscal Q1 revenue. Weak gross margins and a disappointing FQ2 revenue and earnings outlook weighed on the stock. The AI server maker said its financial performance is being hit by tariffs, which are affecting imported sub-components and outsourced production. HPE plans to mitigate the impact “through supply-chain measures and pricing actions.” Margin compression was widely expected as AI server producers ramp up investment in advanced chips and high-cost manufacturing, but the tariff-related hit this early caught investors off guard. Several analysts cut their price targets for HPE, though most expect performance to improve later in the fiscal year.
❖ IBM (IBM) continued to perform better than other tech stocks amid market mayhem. The legacy tech giant issued strong long-term guidance, projecting higher-than-expected annual revenue growth for 2026-2027, led by its expanding software business. IBM’s ongoing shift from traditional hardware to software and services, driven by strategic acquisitions, is strengthening its market position and financial performance.
In other positive news for the Big Blue, it recently won its battle in the U.K. court against LzLabs, a Swiss a tech company which IBM had accused of illegally reverse-engineering its mainframe software.
❖ Oracle’s (ORCL) fiscal Q3 2025 revenue grew 6% year-over-year to $14.13 billion but fell short of analysts’ expectations. Adjusted EPS came in at $1.47, slightly below the projected $1.49. The revenue miss was primarily due to currency headwinds and slower growth in Oracle’s non-cloud legacy businesses.
ORCL’s cloud revenue surged 24%, with cloud services and license support now accounting for 77% of total revenue. Oracle Cloud Infrastructure (OCI) revenue jumped 52%, fueled by extraordinary demand for AI, with GPU consumption skyrocketing 336%.
Oracle’s remaining performance obligations (RPO) surged 62%, signaling strong future revenue potential. Cloud RPO grew nearly 80%, further reinforcing long-term growth expectations. The company signed over $48 billion in sales contracts during the quarter, securing deals with AI leaders Nvidia, Meta, OpenAI, and xAI. These agreements are expected to drive a 15% increase in total revenue in fiscal 2026, beginning in June.
Oracle now holds a $130 billion backlog of signed deals, which it expects to translate into sustained long-term growth. Notably, this figure does not include potential business from the $100 billion “Project Stargate” – a venture with OpenAI, SoftBank, and others. While still in its early stages, Oracle and OpenAI reportedly plan to deploy 64,000 Nvidia GB200 AI chips in a massive Texas data center by the end of 2026.
These aggressive cloud and AI investments are impacting short-term profitability, with FQ4 EPS guidance coming in lower than anticipated. However, they are necessary to resolve capacity constraints and fuel long-term revenue growth. Surging AI-related demand continues to outstrip supply, and Oracle’s cloud infrastructure expansion is currently outpacing its data center capacity, limiting immediate revenue capture. To address this, the company is doubling its data center footprint in 2025 and plans to more than double its capital expenditures compared to the prior year.
Wall Street analysts – including those maintaining a “Hold” rating due to valuation concerns after the stock’s strong run over the past year – have expressed optimism about Oracle’s long-term prospects. Many cite its soaring backlog and aggressive capacity-expanding capital expenditures as key growth drivers. Reflecting confidence in its cloud and AI-driven expansion, the board of directors approved a 25% dividend increase.
❖ Dick’s Sporting Goods (DKS) released a set of strong quarterly results, with Q4 2024 revenues and EPS considerably above analyst estimates. The company reported record comparable sales growth of 6.4% for the quarter. Reflecting its commitment to shareholder returns, DKS announced a 10% increase in its quarterly dividend and authorized a $3 billion share repurchase program. However, the conservative guidance for the upcoming fiscal year raised concerns among investors.
The company anticipates a 1-3% increase in FY2025 comparable store sales, down from the 5.2% growth observed in the previous year. Additionally, the projected EPS range of $13.80 to $14.40 falls short of the $14.82 consensus estimate, reflecting expectations of a less favorable economic environment. DA Davidson analysts suggested that DKS’s current share drop is a buying opportunity, adding that the below-consensus outlook is not a reason for concern as the company can easily surpass its own guidance, as it did in 2024. Moreover, according to the brokerage, most companies have been guiding conservatively in the current environment.
❖ As DA Davidson noted, many companies are issuing softer guidance for the ongoing quarter, given the elevated economic uncertainty and weakening consumer sentiment. Thus, Verizon (VZ) faced heavy selling pressure on Tuesday after warning of potentially weak subscriber growth in Q1 2025, citing softening consumer demand and rising competition. Despite these challenges, Verizon reaffirmed confidence in its full-year financial guidance. However, its candid admissions about these headwinds were seen as unusual and concerning, triggering a stock decline that also weighed on its telecom peers.
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Portfolio Stocks Under Review
❖ We are placing Hewlett Packard Enterprise (HPE) under review due to its disappointing FQ2 revenue and earnings outlook, as discussed in the “Portfolio News and Updates” section above. Under normal market conditions, weak guidance would warrant selling the stock. However, given the extreme market anxiety and volatility, we are exercising caution with the “sell” button for now.
❖ We are keeping Salesforce (CRM) under review due to muted guidance it provided in its earnings report. Although analysts remain bullish on CRM, several have reduced price targets, raising concerns about the timeline for meaningful returns on its heavy AI investments. D.A. Davidson analysts argue that despite Agentforce’s early success, Salesforce’s AI focus is coming at the expense of its core business, which continues to decelerate. Since Agentforce isn’t expected to meaningfully contribute to revenue for at least a year, overall revenue growth may slow further in 2025. Amid elevated market volatility, this slower growth trajectory could weigh on the stock, despite its strong long-term potential.
❖ We are keeping ITT (ITT) under review despite strong Q4 2024 results and the following multiple analyst price-target upgrades. Our caution is primarily driven by President Trump’s recent announcement of a 25% tariff on all steel and aluminum imports, effective March 12th, 2025. As a manufacturer of engineered components and customized technology solutions, ITT relies on steel and aluminum as key raw materials. The imposed tariffs are expected to increase the costs of these materials, potentially impacting ITT’s production expenses and profit margins.
It’s important to note that the full impact of the tariffs will depend on various factors, including ITT’s ability to mitigate increased costs through supply chain adjustments, pricing strategies, or operational efficiencies. Additionally, potential retaliatory measures from trade partners and overall market conditions will play a role in shaping the company’s financial outlook. Therefore, ITT remains in focus until we gain a clearer picture of the policy developments and their impact on the company.
❖ We are removing RTX (RTX) from our “under review” bracket as it is set to be one of the key U.S. beneficiaries of Europe’s defense budget expansion. Although the European Commission has proposed that defense loans be directed toward domestic production to strengthen the continent’s defense industry, European manufacturers lack the capacity to meet rearmament demands. Many are already at maximum production and face supply chain bottlenecks.
Moreover, U.S. firms dominate advanced defense technologies: Europe cannot independently manufacture modern defense solutions at the necessary scale and remains heavily reliant on U.S. defense firms for missiles, missile defense systems, air defense systems, tanks, rocket launchers, and other high-tech weaponry. While the EU aims to boost domestic production in the long run, U.S. defense firms will continue to secure major contracts in the short to medium term as Europe rushes to rearm – RTX among the key beneficiaries.
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Portfolio Earnings and Dividend Calendar
❖ The Q4 2024 earnings season for the Smart Portfolio companies is over, with the next reports – from companies whose fiscal years are shaped differently – scheduled for April.
❖ The ex-dividend date for Amphenol (APH) and Taiwan Semiconductor (TSM) is March 18th.
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New Buy: Lockheed Martin (LMT)
Lockheed Martin designs and manufactures advanced defense, aerospace, and security solutions for governments and commercial clients worldwide. The company develops cutting-edge military aircraft, missile defense systems, space exploration technology, and cyber capabilities, ensuring national security and strategic deterrence. Lockheed Martin integrates AI, autonomous systems, and advanced analytics to enhance mission effectiveness and operational readiness. With a focus on modernization, hypersonics, and next-generation warfare, the company supports defense agencies in adapting to evolving threats.
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Arming the Free World
Lockheed Martin was formed in 1995, through the merger of Lockheed Corporation and Martin Marietta. Today, with a market cap of over $111 billion and annual revenues exceeding $71 billion, LMT is the world’s largest producer of armaments and defense systems and the largest defense contractor.
Lockheed consistently ranks at the top of the Defense News Top 100 list, which ranks global defense companies by sales. The majority of LMT’s revenue comes from U.S. government contracts, particularly with the Department of Defense, though it also supplies allied nations through foreign military sales.
While other companies compete in specialized areas (e.g., Northrop Grumman in stealth bombers, RTX in radar and electronic warfare), Lockheed Martin maintains the broadest dominance across defense sectors, leading in advanced military technology across air, land, sea, space, and cyber domains.
LMT is the world’s largest military aircraft manufacturer, producing the F-35 fighter jet, C-130 transport, and other key platforms. It is the largest supplier of integrated missile defense systems, including Aegis, THAAD, and PAC-3 interceptors. Additionally, Lockheed is a leading space contractor, developing national security satellites, missile warning systems, deep-space probes, and hypersonic glide vehicles for NASA and the U.S. military. Moreover, LMT is a top cybersecurity and artificial intelligence provider, specializing in autonomous systems, electronic warfare, and advanced battlefield networking.
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Europe Calling
Europe has significantly increased its defense budgets in response to geopolitical tensions in 2023 and 2024. Following President Trump’s suspension of military aid to Ukraine and acceleration isolationist rhetoric, EU nations are poised to expand spending by much more to bolster their own defense capabilities. The European Commission proposed the EUR 800 billion ($874 billion) “ReArm Europe” plan, aiming to enhance the continent’s defense infrastructure and reduce reliance on external allies.
However, following decades of underinvestment, Europe’s defense capabilities are severely constrained, with the process of gaining sufficient capacity expected to take years even with the extraordinary investment flowing into the sector. Many European arms manufacturers are already at maximum production capacity and face supply chain bottlenecks. Countries like Germany and Poland are turning to U.S. suppliers for high-tech military systems that they cannot produce domestically at scale. Given these constraints, U.S. defense companies are expected to see increased contracts to support Europe’s rearmament efforts.
Moreover, U.S. firms dominate advanced defense technologies. Europe cannot independently manufacture modern fighter jets at the scale needed. The F-35, made by Lockheed Martin with RTX (RTX) supplying key components, remains the fighter jet of choice for NATO countries. European nations rely heavily on the U.S.-made missile and air defense systems, as well as other assault and defense solutions and technologies.
While Europe aims to build up its defense industry in the long run, it lacks the ability to produce key weapons systems immediately. European defense firms are focusing on scaling up artillery shells and basic munitions, but high-tech weapons will still come mostly from the U.S. in the near to medium term.
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Allied Profits
Lockheed Martin stands to gain the most from Europe’s escalating defense spending, thanks to its role as the world’s largest defense contractor with a broad portfolio spanning aerospace, missiles, and space systems, and its strong ties with NATO allies.
European countries are expanding their arsenals, with the F-35 becoming a key part of their air forces. Orders from Germany, Poland, Finland, Switzerland, Denmark, Italy, and the Czech Republic point to long-term demand, with over 600 F-35s expected in European service by 2035. Missile defense is another growth area, as Poland prepares to acquire over 100 HIMARS launchers and multiple NATO members continue investing in PAC-3 Patriot interceptors. Sikorsky, Lockheed’s subsidiary, has also secured Black Hawk helicopter contracts across Europe.
Though Lockheed Martin still generates most of its revenue from U.S. contracts, about a quarter comes from international clients, and its $176 billion backlog signals surging demand. While the company has benefited from Ukraine-related sales, those remain a minute part of its business, making it less vulnerable to shifts in U.S. foreign aid policy. Meanwhile, U.S. military assistance to Israel is expected to drive additional demand for interceptors and precision munitions.
To strengthen its foothold in Europe, Lockheed is localizing more production. Its partnerships with Rheinmetall in Germany for rocket launchers and Polish factories for PAC-3 missile components help address European governments’ preference for domestic manufacturing. This approach not only secures contracts but also reduces the risk of protectionist policies limiting its future sales.
The company has also worked to bolster its supply chain, shifting sourcing to allied nations and expanding production capacity for high-demand systems like hypersonic weapons and missile defense interceptors. Its close relationship with the U.S. Department of Defense ensures priority access to materials, allowing it to scale up as needed.
Even if a full-blown trade war erupted between the U.S. and the EU, Lockheed’s role in transatlantic defense cooperation makes it unlikely to face major disruptions. LMT routinely engages in diplomacy alongside U.S. officials – for instance, advocating for allied nations’ purchase approvals or waivers – reinforcing the critical nature of transatlantic security ties.
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Fortified Finances
Lockheed Martin continues to demonstrate financial resilience, underpinned by stable revenue streams and the critical role it plays in allied defense. As the world’s largest defense contractor, its business is built on long-term government contracts, multi-year procurement cycles, and high barriers to entry, ensuring consistent demand for its products and services regardless of economic fluctuations. With a record $176 billion backlog, Lockheed Martin is well-positioned for steady revenue and earnings growth in the years ahead.
In 2024, Lockheed reported $71 billion in sales, up 5% year-over-year, driven by sustained demand across its Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space divisions. Its fourth-quarter revenue came in at $18.6 billion, in line with the prior year, while earnings were affected by a one-time $1.7 billion charge tied to classified programs. Despite this, the company maintained strong cash flow, generating $7 billion in operating cash and $5.3 billion in free cash flow, allowing it to return $6.8 billion to shareholders through dividends and share buybacks.
Looking ahead, Lockheed projects 2025 revenue between $73.75 billion and $74.75 billion, representing a stable 4-5% growth, while EPS guidance of $27.00 to $27.30 suggests continued earnings consistency. While some near-term headwinds exist, such as delays in the F-35’s Technology Refresh 3 upgrade, these do not pose a structural risk to Lockheed’s financial trajectory.
Unlike companies dependent on commercial demand cycles, Lockheed benefits from entrenched defense budgets, strategic alliances, and government-backed contracts that insulate it from broader market volatility. With rising global defense spending, increasing European procurement, and expanding missile defense initiatives, Lockheed remains in a uniquely secure financial position. Its role as a cornerstone of U.S. and allied defense policy ensures a stable and growing revenue base, making it one of the most resilient defense stocks in any market environment.
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The Defense Dividend
Lockheed’s stock has returned around 11% over the past year, broadly in line with the S&P 500 and outperforming all of its U.S. defense peers except RTX, a Smart Portfolio holding. Despite this solid performance, LMT remains attractively valued, trading at a discount to its sector. It sits near the midpoint of the valuation range for defense stocks while demonstrating equal or superior profitability and capital efficiency. Moreover, discounted cash flow models suggest LMT is undervalued by over 30%, highlighting a strong value opportunity.
Beyond stock price appreciation, Lockheed Martin has a strong track record of shareholder returns through dividends. It has paid dividends for over 40 years and increased them annually for the past 22 years. Its 2.7% dividend yield is nearly double the sector average and higher than that of its direct peers. With a moderate payout ratio and solid financials, LMT is well-positioned to sustain dividend growth for years to come.
Lockheed also maintains an aggressive share repurchase strategy. In October 2024, the company’s board authorized an additional $3 billion in buybacks, bringing total authorization to approximately $10 billion. Over the course of 2024, LMT repurchased about $3.75 billion in stock, reinforcing its commitment to shareholder value.
Analysts rate LMT a “Buy,” with an average price target implying a ~14% upside. While Lockheed’s greatest strength is its indispensable role in defense, its stock reflects this through a low beta, indicating minimal dependence on economic cycles. These attributes make LMT a stable investment during market volatility while offering consistent long-term growth potential.
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Investing Takeaway
Lockheed Martin is the world’s largest defense contractor, playing a central role in U.S. and allied military strategy. Its dominance in military aircraft, missile defense, space systems, and cybersecurity ensures stable, long-term demand, reinforced by government-backed contracts and rising global defense budgets. Europe’s rearmament, driven by geopolitical tensions, is fueling additional orders, with the F-35, PAC-3 missiles, and HIMARS systems in high demand. Lockheed’s financial stability is reflected in its $176 billion backlog, steady revenue growth, and strong cash flow. The company prioritizes shareholder returns through dividends and aggressive buybacks. Despite recent stock gains, LMT remains attractively valued, with analysts projecting further upside. Its essential role in global defense, financial resilience, and low market volatility make it a compelling long-term investment in an increasingly uncertain world.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
The markets were a sea of red over the past month, but our Winners’ ranks have remained unchanged, still including 12 stocks: GE, AVGO, TPL, ANET, HWM, TSM, EME, ORCL, PH, IBKR, APH, and ITT.
The first contender is still IBM with a gain of 18.41% since purchase. Will it close the gap, or will another stock outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
