Defense stocks see huge surge – here’s how investors are playing them now

Shares of Lockheed Martin, Raytheon and Boeing hit all-time highs in Friday trading. And while some strategists and portfolio managers say they like defense stocks from a fundamental perspective, their near-term conditions and valuation as an industry offer some hesitations going forward.

Global geopolitical tensions have given way to upside for the names; the S&P 500 aerospace and defense index is now pacing for its best weekly performance since May. Matt Maley, equity strategist at Miller Tabak, likes defense stocks on a longer-term basis but pointed to some issues more recently, on the back of the group's surge.

"Obviously we have a situation where President Trump wants to increase the defense budget, and we're not getting a whole lot of pushback from Democrats; they're focused on other issues. We also have North Korea, and I think that's going to escalate. So on a fundamental, long-term basis, they still should look good," Maley said Thursday on CNBC's "Power Lunch."

In the near-term, however, the stocks look overbought from a technical standpoint.

"They've kind of leveled out in the last couple of weeks," he said.

Specifically, Raytheon and Lockheed Martin are stuck in "sideways bands," he said, and the stocks have not yet broken above their recent sideways trajectory.

At current levels, the defense names do not present a good value for investors, said Erin Gibbs, portfolio manager at S&P Global.

"We like these stocks because they're nice blue-chip, stable growth companies. But overall, we're expecting about 9 percent growth for this year and next year, which is 20 percent less than the S&P 500," Gibbs said Thursday.

Furthermore, the industry's valuations are quite high relative to the S&P 500, she said.

The defense industry's valuation has broken above 12-year highs, she said, "and the multiple expansion versus the broader market just keeps getting higher and higher. So your prices are going up, but your earnings are just kind of stable. So you're paying a higher price for slower growth than you would for just the S&P 500."


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