Even though I am known for short selling, like everyone else in fund management, I have made more money from longs than shorts (its just the nature of the beast). Before I closed my fund in 2022, I did quite like defence as a long theme, and this area has really moved. One stock I owned was Rheinmetall (RHM GY). At the time its defence business was loss making, and its auto business was struggling. It was trading at around book, which to me was amazing. Defence business very rarely trade that cheap. We doubled our money in it, and then in 2021 I closed down the fund and we exited the position. It has continued to trade well, as it has become THE European defence stock.
It has rerated from 1 times EV sales to 8 times EV sales, and market cap has gone from EUR 3.5bn to EUR 87bn today. If I still owned the stock I would be getting nervous - but would probably still hold it, but I would not be adding.
But what Rheinmetall shows is that the market is willing to pay a lot for government protected growth. I also thought Mitsubishi Heavy could be an interesting stock (the maker of the famous Mitsubishi Zero). This has also rerated massively. Whether this is worth chasing or not is hard call, as it has a lot of different businesses.
However, not all my defence stocks have moved. I thought the US would embark on a massive ship building program to try and offset Chinese superiority here. There is only one listed company that builds US navy ships - Huntington Ingalls Industries (HII US). It is also the largest navy shipbuilder. If US suddenly increases shipbuilding orders, this would be the only way to play it. The stock has been a big nothing burger for 10 years. Part of the problem has been margins which have been squeezed (one reason I could not chase Rheinmetall, as you are assuming margins remains good - which is not always the case with military orders).
Another issue is whether ship building is a dead option in a world with drone warfare? I don’t know the answer here, but it is one of the few defence stocks I would define as cheap. Another one is a Chinese one, AviChina. This was one of the first stocks I bought with my first fund at 0.50HKD entry price in 2006 (I did mention I made more money being long). It has been worse than dead money since 2015. Its an unusual stock as most of the value lies in China mainland listed companies. One of its listed subsidiaries built the Chinese fighter that apparently shot down a Rafale jet in the recent India-Pakistan encounter. There are risks to owning this stock - mainly sanctions - but it looks interesting to me for investors that can handle that risk.
And finally, there was one last stock that for years did nothing, but suddenly seems to be moving, so I have decided to take a position in.
