2 Space Stocks to Buy in February

Lockheed Martin's space business remains a strategic growth driver, with its space segment generating $13 billion in sales and a backlog near $40 billion; the company won up to $1 billion from the Space Development Agency to build 18 Tranche 3 Tracking Layer satellites. Honeywell's defense and space sales rose 10% in Q4 and the company plans to spin off Honeywell Aerospace in Q3 2026 under longtime executive Jim Currier, positioning the unit as a purer aviation/space play to compete for government contracts. Both developments underscore durable government-funded demand for satellite and spacecraft components and may influence investor allocations toward established aerospace/defense names versus earlier-stage space equities.

Analysis

Market structure: Lockheed (LMT) and Honeywell (HON) are direct beneficiaries of government-driven space and missile-defense spending — Lockheed’s $1B SDA Tranche‑3 award and a $40B space backlog provide multi-year revenue visibility that strengthens pricing power for prime contractors while pressuring small, unprofitable launchers and niche suppliers. Expect consolidation among tier‑2 avionics/sensor suppliers as primes internalize critical components; marginal suppliers face pricing pressure and longer payment cycles. Cross-asset: clearer government cash flows tend to compress equity volatility and reduce credit spreads for investment‑grade defense names, mildly bullish for IG bonds while reducing safe‑haven FX flows into USD on incremental capex neutrality; commodities exposure (titanium, specialty alloys) is modest but positive over 12–36 months.

Risk assessment: Tail risks include program failures (Orion/launch anomalies), a 10–20% real cut in US defense space budgets, export control escalation, or Honeywell’s spin-off poorly received by markets; any of these would knock 15–30% off forward multiples for exposed names. Immediate (days) risk: headline-driven moves around SDA/NASA updates; short-term (weeks–months): Honeywell spin-off execution (Q3 2026) and defense appropriations; long-term (years): tech obsolescence and supply‑chain concentration. Hidden dependencies: Honeywell Aerospace will inherit cyclicality tied to commercial aviation recovery and government contract win-rates; Lockheed’s backlog is lumpy and conversion timing is the key second‑order variable. Catalysts: SDA tranche awards cadence, NASA mission milestones, FY2027 budget passage, Honeywell Q3 spin-off filing and initial guidance.

Trade implications: Direct plays: establish modest core long positions in LMT and HON as defensive, cash‑generative plays — 2–3% portfolio each, scaled on pullbacks ≥5% and held 12–24 months to capture backlog conversion and spin realization. Pair trade: long LMT vs short speculative space small‑caps (tickers like ASTS or other subscale launchers) at a 1:0.5 dollar ratio to hedge market beta; target relative outperformance of 10–20% over 6–12 months. Options: prefer defined‑risk bullish spreads—buy 9–12 month call spreads 8–12% OTM on LMT/HON sized to 1% notional each to limit carry. Rotate 3–5% from high‑volatility space ETFs/small caps into Aerospace & Defense (XAR defense overweight) over 1–3 months.

Contrarian angles: The market understates execution risk on Honeywell’s spin-off — if Aerospace posts <10% FCF margin or guidance is conservative, the pure‑play could de‑rate 20–30% at IPO; conversely, a clean margin profile >12% would re-rate HON parent and unlock 15–25% shareholder value. Lockheed is closer to being priced for backlog stability; a 10% backlog slip would be disproportionately punitive, so downside protection (puts or collars) is cheap insurance. Historical parallels: defense primes outperformed after prior budget rebounds but also experienced sharp drawdowns on single program failures (e.g., program Nth‑year test anomaly); monitor backlog conversion and award cadence as early warning signals.

Key Decisions for Investors

• Establish a 2.5% long position in LMT (buy or accumulate on dips ≥5%) with a 12–24 month horizon; use a 10% stop-loss or hedge with a 9–12 month 7–10% OTM put for downside protection.
• Initiate a 2% position in HON ahead of the Q3 2026 Honeywell Aerospace spin-off; plan to trim to 1% after spin completion if Aerospace pro forma FCF margin <10% or exit fully if margin >12% and market re-rates to >12x EV/EBITDA.
• Enter a pair trade: long $1 of LMT vs short $0.5 of ASTS (or a small‑cap space launcher ETF) to exploit prime/subscale divergence; target 10–20% relative return over 6–12 months and unwind on positive spin-off guidance or major SDA/NASA miss.
• Deploy defined‑risk options instead of naked exposures: buy 9–12 month call spreads (buy 10% OTM, sell 25% OTM) on LMT and HON sized to 1% notional each to capture upside from contract awards and spin‑off re‑rating, max loss = premium.
• Reduce speculative small‑cap space exposure by 50% and rotate proceeds into Aerospace & Defense (increase sector weight by 3–5%) over the next 30–90 days; act sooner if headline volatility (implied vol >40% on small caps) persists.