How to choose gun stocks? A guide to leading US and Taiwan stocks layout

Global instability and rising military budgets year after year. From Ukraine, Palestine to the Taiwan Strait, every hotspot is driving capital flows—defense stocks have become a market focus. But not all companies claiming to be in the defense industry are worth investing in; the key is choosing the right targets.

Why talk about defense stocks now?

Modern warfare has transformed. Drones, precision missiles, and information warfare have replaced traditional manpower tactics. While the number of troops may not increase, technological investment will only become more intense. In an era of declining birthrates, spending on equipment is cheaper than maintaining armies, and governments worldwide are well aware of this.

What is the most direct data? Major military powers like China, Taiwan, and the US have all increased their defense budgets over the past two years. This is not a temporary adjustment but a long-term trend. Regional political tensions are heating up, great power rivalries intensify, and military spending will continue to rise.

The underlying logic of choosing defense stocks

Many people oversimplify the defense industry, thinking that as long as a company sells to the military, it’s a pure defense stock. In reality, selecting defense stocks requires attention to three core indicators:

Defense Revenue Share
If a company’s military orders account for less than 30%, it cannot be considered a pure defense stock. For example, Caterpillar is classified as a defense stock, but military revenue is less than 30%. Its main business remains industrial equipment, so its stock price mainly depends on global infrastructure demand, not military spending. Such boundary companies are easily misleading.

Moat Depth
The entry barrier for the defense industry is the highest worldwide. Why? Because it concerns national security, and clients are governments. Building trust takes years or even decades. The technological barriers are also profound—cutting-edge technology is kept in labs and military facilities, while civilian applications often use outdated tech. This makes leading companies almost impossible to replace, giving their stock prices natural support.

Stability of Civilian Business
This is the most overlooked pitfall. Some companies like Boeing and Raytheon, even with stable military orders, can see their stock plummet if their civilian divisions encounter issues. You might think you’re buying into defense dividends, but in reality, the decline of civilian markets and lawsuits can drag down the stock.

US defense stocks tier analysis

First Tier: Pure Defense Leaders

Northrop Grumman(NOC)
The fourth-largest defense manufacturer globally and the world’s largest radar producer. The purest—almost all business is military. The company has 18 consecutive years of dividend growth, which is rare in global markets.

This year, it accelerated a $500 million share buyback program to protect shareholder interests. Most importantly, Northrop’s R&D focuses entirely on future technologies—space, missiles, communications—aligning with the US ‘strategic deterrence’ strategy. As long as global crises exist (war or no war), countries will keep increasing defense investments. From a long-term perspective, Northrop is the most pure defense stock choice.

General Dynamics(GD)
One of the five major US defense suppliers, covering land, sea, and air. Interestingly, although not purely defense (civilian accounts for 25%), its civilian segment is highly independent, making its overall revenue less sensitive to economic cycles.

During the 2008 financial crisis and the 2020 pandemic, General Dynamics remained profitable. It has 32 consecutive years of dividend growth—only 30 US companies can claim this. Its civilian products include Gulfstream jets (serving the wealthy), and military products include defense, navy, and weapon systems. While growth isn’t as rapid as pure defense companies, its stability is unmatched—suitable for conservative investors.

Lockheed Martin(LMT)
A defense giant with long-term steady stock appreciation, mostly retraced during market corrections. Known for its long history and deep technological accumulation, it is a blue-chip representative in the defense sector.

Second Tier: Dual-Use (Risk Zone)

Boeing(BA)
The world’s largest commercial aircraft manufacturer and also one of the US’s five major defense suppliers. The contradiction here is evident—large but volatile civil aircraft sales, stable but smaller military orders.

The 737 MAX incidents in 2018-2019 led to worldwide grounding, and the pandemic further impacted profits. Worse, Chinese commercial aircraft companies began to challenge Boeing’s decades-long monopoly. While military business continues to grow steadily, the outlook for civil aviation remains uncertain. From an investment perspective, Boeing is more suitable for bottom-fishing than chasing rallies.

Raytheon(RTX)
Also involved in both military and civilian markets, but performance was poor in 2023—declining throughout the year. The root cause lies in its civilian segment: parts supplied to Airbus A320neo aircraft may crack under high stress, causing engine issues. The travel rebound has driven airline procurement, turning into a nightmare for Raytheon—over the next 3-4 years, about 350 A320neos annually will require inspections, with each maintenance taking up to 300 days.

This is not just revenue impact but also involves lawsuits and customer loss. While military orders continue to grow steadily, investors should not ignore the problems in the civilian segment. This stock requires further observation.

Taiwan defense stocks layout

Taiwan is at the geopolitical focal point, with both sides increasing military budgets, making it a hot topic. Over the past two years, both China and Taiwan have raised their defense budgets.

Thunder Tiger(8033.TW)
Once a remote-controlled model toy manufacturer, it has spectacularly transformed with the explosive growth of the drone market, becoming a defense stock. Its stock surged significantly in 2022. As military procurement demand increases, this company warrants ongoing attention. The key is whether its military orders can continue to grow.

Hannxiang(2634.TW)
Its business model is quite unique—civilian segments focus on maintenance and parts sales, while military segments mainly produce trainer aircraft. This diversified layout avoids the single-product risk faced by companies like Raytheon and Boeing. Orders are also increasing with the growth of the drone market and reopening demand.

Compared to competitors caught in difficulties due to single-brand or model issues, Hannxiang’s diversified maintenance and repair business forms a natural shield—when the industry is good, profits grow; risks are more balanced, and stock prices are relatively stable.

Three truths about investing in defense stocks

Warren Buffett once said that the best businesses have three treasures: enough cash flow (wet snow), enough runway (market space), and a deep moat (competitive advantage). Defense stocks hit all three:

Endless demand
Human conflicts have never ceased throughout history, and the demand for armies persists across eras. This industry’s runway is not just long—it’s virtually infinite. Unlike some industries that are disrupted by technological progress, military needs are a constant.

Impenetrable technological barriers
The most advanced technologies are in military applications—civilian tech is always a derivative of military tech. Entry barriers are extremely high—clients are only governments, and trust takes at least a decade to build. National patents and exclusive supply agreements lock leading companies in place, leaving little room for new entrants.

Geopolitical dividends continue to heat up
The world is entering an era of regional politics, with great power rivalries intensifying and war probabilities rising. The manufacturing reshoring strategy initiated during Trump’s era has not reversed; instead, it has made countries more vigilant about their own defense. Defense spending has become a routine increase, likely to continue for a long time.

The only reason for a sharp decline in defense stocks is ‘disarmament,’ but given current international situations, this probability is almost zero.

Risks in investing in defense stocks

But let’s dispel illusions—picking defense stocks is most about avoiding pitfalls. There are two key traps:

First, low defense revenue proportion. Companies like Caterpillar, with less than 30% military revenue, mainly follow global economic cycles, not pure defense.

Second, civilian sector dragging down. The lessons from Boeing and Raytheon are painfully clear—no matter how stable military orders are, they cannot prevent decline in civilian markets and lawsuits. When choosing stocks, it’s crucial to understand the revenue structure—don’t focus only on defense parts and ignore the overall.

That said, the risk of defense stocks going bankrupt is very low. Their main clients are governments, relationships are close, trust is high, and countries are unlikely to let key defense companies go bankrupt. This provides extra psychological security for long-term investors.

Summary

Defense stocks are a promising investment direction for the future, with stable market demand and deep moats. But thorough research is essential before investing:

First, check the proportion of defense revenue; second, assess the stability or risks of civilian business; third, review financial health, geopolitical trends, and industry outlook. Only by weighing these factors comprehensively can you truly profit from the opportunities in defense stocks rather than getting caught in pitfalls.