By Senad Karaahmetovic
The U.S. defense stocks are likely to continue outperforming the market, thanks to the ongoing conflict in Ukraine and a potential conflict in Taiwan, according to Bank of America analysts.
One particular area of the defense sector to be monitored closely is the one focused on the development of nuclear weapons.
"We expect concerns of nuclear proliferation to drive secular and governmental defense spending, particularly as the US moves away from nation-state conflicts, like in the Middle East, and focuses attention on near-peer threats. We expect US defense companies to see much of the upside from increased demand for nonstrategic nuclear weapons," the analysts said in a client note.
Non-strategic nuclear weapons have a shorter range than strategic nuclear weapons. The analysts expect both the United States and Europe to shore up their non-strategic inventories.
"As Europe lacks the industrial footprint the US has cultivated, we expect that US defense primes will be called upon to fill demand, reflecting a significant upside to these names," they added.
Along these lines, the analysts see Northrop Grumman (NYSE:NOC), Boeing (NYSE:BA), and Lockheed Martin (NYSE:LMT) benefiting from the increased demand as these three have the largest nuclear operations.
"This reinforces our Buy rating on Northrop Grumman. We remain Neutral on Boeing and Lockheed Martin on account of continued supply chain challenges and operational hurdles," the analysts concluded.