The USA is about to exit a Reagan Era nuclear weapons treaty with the Russians. This could set off another arms race in weapons of mass destruction. It could also provide profitable investments for defense stocks in a new nuclear era. Zacks suggests two defense stocks to buy if we end up in another nuclear arms race with the Russians and Chinese.
President Donald Trump has decided to withdraw the United States from the landmark nuclear weapons deal signed with Russia in 1987 that banned both nations from owning, producing and test-flying nuclear missiles.
While Trump’s recent decision may not be a welcome move for Russia, it could be a new chapter for domestic defense companies in terms of developing nuclear weapons. Therefore, it might be a good idea to invest in some defense stocks that stand to benefit the most.
The basis of Trump’s move is that Russia appears to be violating the agreement and China is not part of it. Like the prospect of a permanent trade war, this move may have more to do with national defense than with anything else.
The stocks that Zacks suggests are Northrup Grumman and Raytheon.
Northrup Grumman makes advanced products and provides high tech services for intelligence, logistics, reconnaissance, cyber operations, and autonomous systems. They produce, upgrade, and maintain the country’s Minuteman III ICBM force. Their stock is likely to grow 27% by the end of 2018.
Raytheon also has a strong foothold in the high tech world of products and services with military applications. Their focus is largely on integrating high tech solutions and providing advanced services. They are currently partnering with Lockheed Martin to upgrade US nuclear deterrent capabilities with more advanced designs and capabilities. Their earnings will grow by about 30% during 2018.
US Missile Defense Capabilities
The risk of a new nuclear era did not just pop up in the last few weeks. When the USSR was falling apart the concern was that they could not secure their nuclear arsenal against theft or purchase by rogue nations. Ukraine totally removed their nuclear arsenal and had their security guaranteed in a treaty signed by the USA, England, and Russia. Today Russia has annexed Crimea, part of Ukraine, and is supporting separatists in Ukraine’s eastern region. Russian adventurism and secret programs to upgrade their nuclear capabilities have been advancing for several years. Meanwhile, China is flexing its muscles with annexation of islands in the South China Sea and claiming those international waters as their sovereign territory. Meanwhile, the USA has continued to abide by the 1980’s nuclear agreement signed by Reagan and Gorbachev.
Bloomberg wrote an opinion piece earlier this year saying that the US needs a better missile defense. They look at the inadequacy of the US missile defense system.
America’s primary domestic defense system against a nuclear-missile attack is the Ground-Based Midcourse Defense, or GMD, with bases in Alaska and California. More than $40 billion has been spent on this successor to Ronald Reagan’s so-called Star Wars project. Yet it has only 44 “kill vehicles” intended to defend against a small-scale intercontinental attack of the sort North Korea might attempt, and its success rate in testing is only about 50 percent.
During the Cold War, the deterrent used by both the USSR and the USA was that of mutual assured destruction. Both sides had more than enough nuclear weapons to destroy military targets and population centers on the other side, several times over. During the Reagan years the USA started the so-called “Star Wars” program in which the USA developed a missile defense system meant to intercept incoming missiles and destroy them. That system has advanced but is far from fool proof. It did, however, cause the USSR to bankrupt itself trying to keep up and resulted in the fall of the USSR.
Today, it would appear that both Russia and China want to assume more dominant roles in the world and are beefing up their militaries and advanced capabilities. Investors will be smart to look at defense stocks for a new nuclear era as this struggle of global dominance resumes.