What are the Taiwan military industrial stocks? New investment opportunities amid global geopolitical conflicts

The days of the global village seem to be gradually fading away. Since the outbreak of the Russia-Ukraine war, countries have been re-evaluating their defense capabilities, increasing military spending, which has inadvertently created unprecedented development opportunities for the defense industry. Moreover, from information warfare, drones to precision missiles, the nature of modern warfare has long changed; it no longer relies solely on manpower mass tactics, but rather on who can master technological advantages to gain the upper hand in conflicts.

Against this backdrop, not only the US defense giants benefit, but Taiwan also has several defense stocks worth paying attention to. The sensitivity of the Taiwan Strait geopolitical situation has led to annual increases in the island’s national defense budget, creating growth opportunities for local defense companies.

Are defense stocks really worth investing in? Let’s look at these three points first

To determine whether defense stocks are good investments, Warren Buffett’s investment philosophy provides a useful framework. He emphasizes finding businesses with “enough snowball effect” and “long runway,” and the defense industry has unique advantages in these three aspects.

First, the runway never ends

Since recorded history, competition and conflict between nations have never ceased. As a result, military procurement needs are rigid, and the industry’s life cycle is much longer than most civilian industries. As long as nations exist, demand for military equipment will not disappear.

Second, entry barriers are extremely high

The most advanced technologies are often first applied in military fields, with civilian markets coming later. This creates a natural technological moat. Plus, given the importance of national security, trust takes time to build, and many defense companies have close relationships with governments, sometimes holding exclusive supply contracts. This makes it difficult for established industry leaders to be replaced by new competitors.

Third, geopolitical dividends are fermenting

The world is gradually shifting from the “global village” concept back to “regional politics.” The US “reshoring” policy, coupled with intensified great power competition, means countries are reluctant to relax their defense budgets. This trend is expected to continue in the foreseeable future unless an extremely low-probability event like “global disarmament” occurs.

The top five US defense contractors: stock analysis and selection guide

Pure defense companies: Lockheed Martin and Northrop Grumman

Lockheed Martin(LMT) is the world’s largest defense contractor, focusing on weapons systems, aircraft, and missiles. From a long-term chart, the stock price shows a stable upward trajectory, with dips mostly due to broader market corrections. For long-term investors, this is a relatively pure choice among defense stocks.

Northrop Grumman(NOC) is the fourth-largest global defense manufacturer and the largest radar producer. Its advantage lies in technological leadership, especially in space, missiles, and communications. More notably, the company has increased dividends for 18 consecutive years and launched a $500 million share buyback plan this year. As long as global countries remain concerned about national defense (which is almost always), Northrop’s orders will keep flowing.

Hybrid defense-civilian stocks: need careful discernment

Raytheon(RTX) and Boeing(BA) both operate in military and civilian markets, but this also poses risks.

Raytheon’s stock performance has been weak this year mainly due to quality issues with civilian aircraft parts affecting Airbus. This not only impacts reputation but also exposes the company to lawsuits and potential customer loss. Although defense orders are still growing, problems in the civilian segment could drag down overall performance.

Boeing’s situation is similar but more complex. The 737 MAX crashes, pandemic impacts, and emerging competition from China’s COMAC make the outlook for its civil aircraft division uncertain. From an investment perspective, Boeing’s military revenue should grow steadily, but the stock’s true driver is its civilian business.

General Dynamics(GD) offers another perspective. Although not purely defense, its civilian segment (mainly Gulfstream jets) is relatively counter-cyclical, providing stable overall revenue. The company has increased dividends for 32 consecutive years, a rare achievement among US stocks. With stable income and less sensitivity to economic cycles, it offers a low-volatility defense stock investment option.

Blurred boundaries: the lesson from Caterpillar

Caterpillar(CAT) is interesting. Although classified as a defense stock, military revenue accounts for less than 30% of total revenue; its main business is industrial equipment. If military conflicts lead to regional reconstruction, Caterpillar’s machinery will benefit. But fundamentally, its stock price depends more on global infrastructure investments and raw material markets than on military procurement.

This reminds investors of an important principle: Don’t just look at the name, look at the revenue structure.

What about Taiwanese defense stocks? Local opportunities and risks

Taiwan is in one of the world’s most sensitive geopolitical hotspots, with both sides’ military budgets attracting international attention. Over the past two years, Taiwan’s defense budget has continued to increase, bringing tangible order growth for local defense companies.

Thunder Tiger: From toys to drones

Thunder Tiger(8033.TW) is worth noting for its transformation. Originally a remote-controlled model aircraft manufacturer focusing on toys, it shifted to become a defense supplier as the drone market exploded. In 2022, its stock price surged significantly, and with ongoing military demand, there is still room for growth.

Hanxiang: Stable revenue from maintenance market

Hanxiang(2634.TW) has taken a different route from Boeing and Raytheon. Its business spans both defense and civilian sectors, but the key difference is that its civilian segment mainly involves aircraft maintenance, repair, and parts sales, not manufacturing.

What does this mean? As long as the aviation industry continues to operate (post-pandemic demand remains strong), Hanxiang can profit steadily from maintenance. Its military segment mainly involves trainer aircraft, which will benefit from growth in drone markets and increased military needs. Compared to Boeing, which has been troubled by single-model issues, Hanxiang’s diversified business is more resilient, and its stock performance is relatively stable.

Key considerations for investing in defense stocks

Before choosing defense stocks, several key indicators must be examined.

First, look at the proportion of defense revenue. If a company’s defense business accounts for less than 10%, with most revenue from civilian markets, you might not benefit from defense industry growth and could be exposed to civilian market volatility.

Second, assess whether the company’s products align with future warfare trends. Modern military size may not expand significantly, but technological investment will continue to increase. Demand for high-tech products like drones, missiles, and communication systems will rise, while traditional ground equipment orders may slow. It’s important to see if the company’s product focus matches these trends.

Third, don’t ignore the civilian segment. The stock prices of Raytheon and Boeing both plummeted due to issues in their civilian markets, not their defense segments. This shows that the health of civilian business often determines stock performance.

Finally, defense stocks are less likely to face corporate bankruptcy. Major clients are governments, and trust and security considerations mean governments are unlikely to let key defense companies fail. This provides an additional safety margin for defense stocks.

Conclusion: the way to invest in defense stocks

Defense stocks indeed have potential, especially in an era of frequent global geopolitical conflicts. But successful defense stock investing isn’t just about buying companies with good names; it requires:

1. Verifying the actual proportion and growth of defense revenue
2. Assessing whether the company’s civilian business might drag down overall performance
3. Checking if product directions align with future military needs
4. Considering financial health, industry trends, and geopolitical factors comprehensively

Regarding Taiwanese defense stocks, Thunder Tiger and Hanxiang are worth attention, but selection should depend on individual risk preferences and investment horizons. Pure defense stocks offer more direct industry benefits but may be more volatile; hybrid defense-civilian stocks tend to be more stable but require detailed fundamental analysis.

As long as regional political tensions persist globally, the ultra-long runway for defense stocks will continue to offer opportunities for investors. The key is to find companies with deep moats and manageable civilian risks, then patiently wait.