Here's Why Morgan Stanley Still Thinks It's Good Time To Buy Defense Stocks - Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC)

Morgan Stanley analyst Kristine T Liwag said after defense stocks closed up 20% in 2022 versus the S&P down 19%, the sector has since underperformed the broader market by 6.5% in the new year.
The move lower in 2023 has partly been driven by a shift in sentiment after reports emerged indicating that House Republicans may be gearing up to oppose wider spending, which could alter the U.S. defense budget's growth trajectory, added the analyst.
The analyst also sees profit-taking after a strong 2022 contributing to the recent selloff. The analyst still thinks it's a good time to buy defense.
In the analyst's view, potential cuts to the Defense budget are not a slam dunk, and the sentiment could reverse should fears of deep cuts, which the analyst sees as overblown today, start to ease.
The analyst sees the recent pullback in Northrop Grumman Corp NOC stock price providing an attractive opportunity to accumulate shares and reiterate both the Overweight rating and Top Pick designation.
While the company screens expensive at a 15% premium to peers, the analyst sees few substitutes for NOC's best-of-breed portfolio and continues to view the stock as the defense ballast to own.
The analyst sees NOC as well-aligned to some of the fastest-growing areas of the U.S. defense budget, including space and nuclear modernization.
Reporting suggests Kevin McCarthy may have entertained a deal to make him House Speaker that would propose a $75 billion cut to defense spending, amounting to a 9% Y/Y cut.
The analyst views the likelihood of this cut as remote. Deep cuts to defense are likely to meet material opposition from GOP defense hawks, the analyst added.
The GOP controls the House by a slim majority and defense spending requires approval by both the House and Senate, along with the President.
Also, bipartisan support for defense spending is on the rise, in the analyst's view, as Russia/Ukraine conflict and tensions with China have underscored the need for continued Defense investment.
While the analyst currently sees fears of deep cuts as overblown, if support for cuts moves from a minority view to a mainstream view, a downside risk to the defense cycle could emerge.
The analyst is watching for potential increases in planned buyback activity for Defense Primes.
As a baseline, Lockheed Martin Corp LMT guided to $4 billion in share repurchases in 2023, and NOC guided to slightly higher than $1.5 billion.
Price Action: NOC shares are trading higher by 1.80% at $450.28 on the last check Friday.
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