The 3 Best Performing Defense Stocks of the Decade

The last decade for defense stocks has been a tail of two halves, with the sector boxed in early in the 2010s by a divided government that led to partisan budget battles and ultimately to restrictions on government spending. During this time, the Pentagon was fighting multiple battles in the Middle East, which consumed much of the Defense Department’s attention and capital and ate into spending on more lucrative research and development work…

That all changed in 2016, when Washington, under single-party control, was able to end sequestration and agree to a two-year budget deal that opened the spigots. In the latter years of the decade, the Pentagon and other government agencies were focused on making up for lost time and funding modernization of IT systems and the nuclear triad while also exploring new technologies and more advanced weapons systems.

Through the ups and downs, much of the defense industry came out ahead of the S&P 500’s 186% return for the decade, but a few stocks stood out as true outperformers. Here’s a look at the top defense stocks of the decade.

A few notes on how the list was formed:

  • Only companies that have been around and publicly traded since Dec. 31, 2009, were considered, although I did include companies like L3Harris Technologies, which began the decade as Harris Corp. but expanded and changed its name and ticker via acquisition.
  • I also excluded companies that operate in the defense sector but do not generate at least half of total revenue from defense sales. That meant excluding companies like BoeingTransDigm Group, and Heico who produced blockbuster returns during the decade, but did so largely thanks to their high-flying commercial aerospace operations.
  • The returns are stock price only and not total return.

My rules excluded a couple of companies that also deserve honorable mention. Booz Allen Hamilton went public in 2010, early in the decade, and has been among the best in terms of total return since it began trading. A surprise honorable mention should also go to shipbuilder Huntington Ingalls, which was spun out of Northrop Grumman in 2011 and has been one of the top performers in the sector since its debut, returning 572.6%.

Company Stock Return Since Dec. 31, 2009
Northrop Grumman (NYSE:NOC) 577.6%
Lockheed Martin (NYSE:LMT) 410%
CACI International (NYSE:CACI) 395.9%

SOURCE: YCHARTS. DATA AS OF DEC. 16, 2019.

Northrop Grumman’s remarkable turnaround

It’s hard to imagine now, but Northrop Grumman was a ship adrift in January 2010. The company’s attempt to sell itself to Lockheed Martin in the late 1990s was rejected by regulators, and Northrop spent the years that followed scrambling for scale, including rolling up the shipbuilding sector and adding space expertise.

It still didn’t seem like enough, and early in the decade, Northrop was constantly rumored to be a potential merger partner with British defense giant BAE Systems and others. Management instead simplified the company, spinning off the shipbuilding operations as Huntington Ingalls, and focused its efforts on aviation, space, electronics, and tech like autonomous systems.

The reboot created a defense powerhouse, strengthened late in the decade with the company’s acquisition of rocket specialist Orbital ATK. Northrop today is a $30 billion-sales giant with a number of keystone Pentagon contracts in its arsenal, including the B-21 bomber program, worth upward of $80 billion. Northrop is also the favorite to win a $60 billion contract to replace the Air Force’s intercontinental ballistic missile stockpile.

Northrop Grumman is much healthier than it was at the start of the decade and has long-term contracts in place that should generate steady revenue for years to come. But it seems unlikely the company’s stock can enjoy another decade similar to this last one. Northrop shares have seen their momentum slow of late, and the company probably only held onto the title as top performer due to issues experienced by rival Boeing this year.

Lockheed Martin: Biggest and best of breed

Lockheed Martin is the world’s largest defense business. In recent years, the company has benefited both from the emerging success of its flagship F-35 Joint Strike Fighter, a trillion-dollar warplane, and from its exposure to areas of particular Pentagon focus.

The F-35, despite a number of early missteps, was always destined to be a star, because the Air Force would be…

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