3 Defense Stocks to Buy in May

U.S. defense spending is surging past $1 trillion this year, with proposals up to $1.5 trillion next year, supporting contractors tied to missile defense, aerospace, and space systems. RTX stands to benefit from Golden Dome-related demand and its large aftermarket business; Honeywell’s aerospace spin-off could unlock value; Rocket Lab has won $816 million and $190 million defense contracts and ended Q1 with $200 million in revenue and a $2.2 billion backlog. The article is broadly bullish on defense names, though it is primarily a sector and stock-picking commentary rather than a single price-moving catalyst.

Analysis

The key market implication is not simply “more defense spending,” but a re-pricing of the entire defense stack toward programs that combine procurement with sustainment. RTX is best positioned because its economics are less dependent on winning the next platform and more on installed-base monetization, which should hold up even if fiscal headlines wobble; that makes it a higher-quality compounding asset than pure new-order beneficiaries. The second-order winner is the supply chain around missiles, sensors, propulsion, and electronic warfare components, where capacity constraints can translate into pricing power and multi-year backlog visibility.

Honeywell’s spin-off is a classic catalyst for multiple expansion, but the deeper read is that the market is likely undervaluing the separation because it may surface a defense pure-play with better growth optics and cleaner capital allocation than the parent. That said, the trade is likely more about rerating over 6-12 months than near-term earnings surprise; once the transaction date nears, the market may begin underwriting stand-alone margin structure and defense mix, which can tighten the discount rapidly. The risk is execution: if the new aerospace entity inherits commercial cyclicality or weaker free cash flow conversion than expected, the value-unlock narrative can stall.

Rocket Lab is the highest beta expression of the theme, but it also carries the most ambiguity because defense wins are still being monetized through a relatively small base. The market may be underestimating how valuable “space infrastructure” becomes when defense buyers prefer dual-use platforms with faster iteration cycles, especially for missile tracking, hypersonics, and launch-adjacent test services. However, this is a longer-duration story and should be treated as a backlog-to-revenue conversion trade, not a clean near-term margin story; any delay in government award timing or integration risk from acquisitions can hit the multiple hard.

The contrarian point is that consensus may be overpaying for headline budget growth while underestimating procurement lag and program mix risk. A larger budget does not automatically flow to incumbents if dollars migrate toward software, autonomy, and smaller modular systems that compress hardware share. That makes the best risk/reward today a barbell: own the cash-generative prime contractor with aftermarket support, and selectively own the highest-conviction disruptor, while avoiding the middle of the pack where valuation can compress if budget translation slows.

Key Decisions for Investors

• Long RTX vs short a basket of lower-quality defense primes over 3-6 months: RTX has the best mix of backlog resilience, aftermarket cash flow, and missile-defense exposure; use a 2:1 notional ratio and trim if the pair underperforms by 8-10%.
• Buy HON into the aerospace spin-off window, 6-12 month horizon: this is a rerating catalyst rather than a near-term earnings trade; target a 15-20% uplift from separation-driven multiple expansion, with a stop if management signals weaker standalone margin or slower distribution of proceeds.
• Long RKLB as a tactical growth/defense hybrid over 6-9 months, but size modestly: upside is meaningful if defense awards convert into revenue faster than expected, yet volatility is high; consider using calls to cap downside given binary contract timing.
• Sell downside protection on RTX after any budget-driven spike, 1-3 month horizon: implied vol should remain elevated on policy headlines, and the stock’s cash-flow profile supports premium harvest; manage by rolling if geopolitical escalation accelerates awards.
• Avoid chasing the pure budget beta trade in the weaker names not backed by installed-base economics; prefer quality defense cash flow over headline exposure, since procurement delays can erase the benefit of a larger topline budget within one quarter.