2 Defense Stocks to Buy in February

Expanding U.S. and German defense budgets are creating clear tailwinds for defense contractors: global military spending hit $2.7 trillion in 2024, the U.S. 2026 budget is roughly $1.48 trillion (about $0.5 trillion higher than 2025), and Germany increased spending from €86bn in 2025 to a €108bn 2026 budget with a target of €152bn by 2029. Lockheed Martin posted 2025 sales up 6% to $75.0bn with EPS slightly down, net cash up 66% to $4.12bn and operating cash flow up 214% to $3.22bn (net margin 6.69%); Rheinmetall reported Q3 2025 sales +13% to €2.78bn, operating margin 12.9%, backlog +23% to €63.8bn, net income +24.8% and is guiding to 35–40% sales growth and a 15.5% operating margin for 2025, supporting a favorable investment case for companies supplying the U.S. and German rearmament efforts.

Analysis

Market structure: Direct winners are prime U.S. contractors (LMT) and German primes (Rheinmetall/RHM/OTC:RNMBY), ammunition makers and defense electronics — evidenced by Rheinmetall Q3 sales +13%, backlog +23% to €63.8B and Lockheed 2025 sales +6% with operating cash flow +214%. Losers include commercial aerospace and civil-focused industrials as capital shifts to defense; pricing power improves for scarce items (ammo, turrets, sensors) enabling margin expansion near-term.

Risk assessment: Tail risks include rapid political reversals (German budget re-prioritization), export-control blowups, or major supply-chain bottlenecks delaying deliveries — each could erase expected 2026 revenue uplifts. Timeline: expect headline-driven moves in days, order confirmations and nominations over weeks–months (Q4–2026), and budget execution/contract awards shaping multi-year revenue through 2029; watch FX (EUR strength) and working-capital financing for OTC-listed Rheinmetall exposure.

Trade implications: Favor convex exposure to LMT and Rheinmetall with hedges — LMT benefits directly from a $1.48T US defense budget, Rheinmetall from Germany’s +25% 2026 jump. Cross-asset impacts: higher fiscal deficits likely upward pressure on 10Y yields (steepen 2s10s), commodities (steel, copper) tighter; consider trimming long-duration growth exposure and rotating into high cash-flow defense names.

Contrarian angles: Consensus underestimates execution, delivery and export-authorization risk — backlog growth can be lumpy and margins mean-revert once production scales or offset clauses kick in. Historical parallel: post-crisis defense spikes (post-2001) produced outsized short-term equity gains but variable multi-year returns; size positions modestly and use event-based exits.

Key Decisions for Investors

• Establish a 2–3% NAV long position in Lockheed Martin (LMT) via a 9–12 month call spread (buy ATM LEAP, sell ~25–30% OTM) to capture 2026 budget upside; target +20–35% price return in 12 months, cut position if quarterly backlog/award flow misses by >15% or stock falls >12% from entry.
• Build a tactical 0.5–1% NAV position in Rheinmetall (use RHM.DE if liquidity preferred; OTC RNMBY size cap 0.5%) via stock or 9–12 month OTM calls to play German rearmament; target 30–50% upside in 12 months, exit if Q4 nominations/backlog growth <10% QoQ or German export restrictions tighten.
• Implement a pair trade: long LMT (2% NAV) / short Boeing (BA, 1.5% NAV) to express defense vs commercial-aircraft divergence; rebalance if the spread narrows by 50% or if BA announces material defense contract wins covering >10% of its market cap.
• Hedge macro: modestly short 10Y Treasury futures (notional ~0.5% AUM) or buy 6–12 month 10Y put spreads to protect real-rate-driven valuation compression while defense-driven fiscal deficits roll out; monitor 10Y yield breaching 3.75% as a trigger to add hedge size.
• Monitor (30–60 days): track German Bundestag execution notes, EU export-license throughput, and quarterly backlog/agreement announcements for LMT/Rheinmetall — if any one misses guidance by >15% adjust or close positions within 2 weeks.