By Omor Ibne Ehsan

The Middle East is going through a tumultuous period once again. And as bad as that may be for the broader economy, certain companies love the kind of scenario we are in now.

RTX Corporation (RTX) and Lockheed Martin (LMT) are set to be two of the biggest beneficiaries of the latest flare-up, with the Pentagon seeking $200 billion to fund it. Moreover, President Donald Trump sees a $1.5 trillion budget for FY2027, something that was impossible just two months ago.

Defense tech stocks were already surging for over two years. But now that a closed Strait of Hormuz could cause stagflation worldwide, it's time to shift gears and snap up the stocks that benefit from conflict.

Defense Stock #1: RTX Corp. (RTX)

RTX Corporation is one of the most consequential defense and aerospace companies in the world, and the ongoing Iran conflict has put it squarely in the spotlight. It formed through the merger of Raytheon and United Technologies. RTX sells guided missiles, air defense systems, radars, jet engines (both commercial and military), and military jet components.

Almost everything it makes is in hot demand at the moment. Tomahawk cruise missiles, which Raytheon manufactures and which fly at high speed and low altitude to evade radar, were among the first weapons used in the strikes. On the defensive side, RTX makes the Patriot radar and ground systems.

David Burns, chief investment officer at Catalyst Funds, said, “The companies that have the most exposure to missile defense systems are the ones that are gonna be the biggest beneficiaries of increased demand.” RTX is one of them.

As far as stagflation goes, we can look to the past. The Korean War, which unfolded during a period of rising inflation, is the most instructive precedent. Defense stocks outperformed both broader equities and bonds during that period. RTX's $268 billion backlog essentially pre-funds years of production, insulating it from demand shocks that hammer cyclical sectors during stagflation.

Defense Stock #2: Lockheed Martin (LMT)

No war can be won without Lockheed Martin, because it supplies the U.S. military with its state-of-the-art weapons. Its Aeronautics arm makes the legendary F-35 Joint Strike Fighter, the C-130J transport, and classified programs developed by "Skunk Works," which famously built the SR-71 Blackbird and U-2 spy plane.

Lockheed Martin also makes PAC-3 Patriot interceptors, THAAD missile defense systems, JASSM long-range missiles, and HIMARS rocket launchers. There's also a space arm that makes satellite constellations, GPS systems, hypersonic programs, and the Next Generation Interceptor (NGI) for ballistic missile defense.

CEO James Taiclet said last year saw "unprecedented demand," as backlog reached $194 billion. This is 2.5 times its annual sales and could take years to be cleared, as ongoing wars are causing backlogs to rise faster than production can catch up.

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In January, the Pentagon signed a landmark seven-year framework agreement with Lockheed to more than triple PAC-3 Patriot interceptor production. Interceptor production is set to rise from 600 to 2,000 units per year, alongside quadrupled THAAD production from 96 to 400 per year. Each unit costs over $10 million. These contracts act as an inflation shield, as most of LMT's revenue comes from long-term, cost-plus-plus-fee, or fixed-price-incentive contracts. Thus, I expect LMT stock to be a winner during stagflation.

On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Source: Barchart