Sell – Lockheed Martin Corp (LMT)
LMT has built a formidable business as one of the most trusted defense contractors in the US. Its entrenched relationship with Capitol Hill and highly specialized technical know-how creates high barriers of entry for the business. LMT has historically dominated with their manned F-series fighter jets that have been the cornerstone of the US defense budget post WW2. However, its concentration in “manned” weaponry makes it vulnerable to displacement as modern warfare and US Defense priorities shift towards greater reliance on “unmanned” weaponry and missile defense systems. In June 2025, the administration proposed increasing investments in missile systems and unmanned aerial vehicles (UAVs), while scaling back on the procurement of LMT’s F-35 fighter jets. Additionally in March 2025, LMT lost out on the contract to develop the US Air Force’s next generation F-45 fighter jet to Boeing worth billions of dollars, wiping out about $6 billion of market value in LMT’s stock (-5.8%). Recent challenges like supply chain disruptions and cost overruns on its F-35 program made it the most expensive program in US Defense history. LMT has a heavier reliance on legacy programs which has been troubled with cost overruns and supply chain issues. As a result, this presents greater political scrutiny and budget risks. LMT’s size and exposure also make it more sensitive to fixed-price contract pressures and federal audit risks. Financially, returns and margins on the business have continued to decline, with significantly large write downs a major detractor from earnings. The recent execution challenges, earnings revisions, and contract complexities challenge the narrative that Lockheed Martin should be traded as a premium defense contractor and removes our conviction in the stock as an attractive long-term investment at today’s levels.

Buy – Northrop Grumman Corp (NOC)
We believe that NOC’s strategic next-generation platforms are better aligned with the Department of Defense’s shifting priorities- with a greater focus on Defense Missile Systems, Intelligence, Surveillance, and Reconnaissance (ISR), Space Systems, and Sensors. Additionally, many of NOC’s future backlogs are in the early-stage of their life cycle, creating a potential revenue tailwind should these programs transition from development to full production phases. Key among them are their Sentinel Missile Program and B-21 stealth bombers. The Sentinel Missile Program is a Ground Based Strategic Deterrent (Inter-continental Ballistic Missile ICBM) program for which Northrop Grumman was the only bidder- that is designed to replace the aging Minuteman III ICBM system managed by the US Air Force. Minuteman III was built in the 1970s as the land-based leg of its nuclear triad deterrence. Launch facilities, silos, and command and control infrastructures were built across three wings in Wyoming, Montana, and North Dakota. Aging infrastructure, Cybersecurity and Reliability Risks, US defense policy priority to modernize all legs of its nuclear triad are key reasons for the Sentinel Missile Program. Northrop initially faced several setbacks to this program in early 2025 as costs were higher than expected, existing infrastructure was unfeasible for Sentinel, and work on launch facilities were suspended due to the evolving requirements of the program. This put a cap on the stock price as investor sentiment was cautious. However, in their Q2 2025 earnings call, Northrop announced that the Air Force approved a restructured baseline. Work on command-and-launch infrastructure has resumed, including design and requirements finalization. Preparatory work also began in June 2025, indicating infrastructure rollout is underway. This, along with successful motor tests in March 2025 has increased our confidence in the program’s feasibility and stability moving forward.

The company’s more matured B-21 stealth bomber program is also an exciting program for the company. Currently, in low-rate initial production, discussions are underway with the US Air Force to accelerate production ramp up beyond its 7 aircraft per year rate. Together with NOC’s Defense Systems (Sentinel) segment, and Aeronautics (B21) segments, they represent high value, long duration commitments that are still in its early-stage lifecycle and could underpin revenue and earnings growth for decades to come. Their Space and ISR segments also add tremendous optionality in business results, though competition is fiercer with shorter product lifespan. Additionally, the company has also been actively expanding their international footprint, pursing export markets and partnerships (eg: alliance with Hanwha in South Korea) to hedge against US budget risks. Although margins today trail other defense contractors, we believe that the potential for margin expansion is there as their programs scale to fuller production. Financially, the company spots a healthy balance sheet with minimal leverage relative to earnings. The company has a strong track record in delivering cash back to shareholders through buybacks and dividends, with an approximately 12% compound annual dividend growth rate over the last 10 years. We believe that Northrop’s strategic next-generation platforms, strong backlog, financial discipline, and diversified global strategy offers a stronger risk-adjusted return profile compared to Lockheed Martin.