Don’t Let Iran Overshadow This Investment Opportunity

Obviously, the strikes on Iran were the big news this weekend. 

They’ll continue to dominate headlines this week, as we see what repercussions (if any) Iran is capable of mustering. 

After all, this conflict (as I pointed out last week) has been decidedly one-sided so far.

Iran’s defensive capabilities have been obliterated. Its main military ally — Russia — is preoccupied in Ukraine. 

The only card they have left to play could be to disrupt energy production and transport in the region. But even that would have a limited and temporary effect. It wouldn’t do anything to alleviate the onslaught from U.S. and Israeli forces. 

Setting that aside, then, it seems as though Iran has no option other than capitulation. And the rumor is that its leaders are already preparing to oust Ayotolla Khomeini and transition to new leadership in hopes of securing a peace deal. 

So despite all the fuss, this conflict figures to be short-lived. That’s why I wouldn’t let it distract you from the bigger, longer-term investment opportunity in Europe. 

There, NATO leaders are currently meeting to discuss the future of security in Europe. 

This is a much bigger deal in the grand scheme of things. 

President Trump is openly hostile toward NATO. He frequently muses about abandoning the alliance altogether, openly sides with Russia against our allies, complains about defense spending levels even when they meet his demands, and for months has been threatening to invade Greenland and annex Canada. 

This put NATO in an uncomfortable position. Member states are divided between those that have lost confidence in American support and those that hope to weather the storm and placate Trump until a friendlier administration takes back the White House.

Either way, though, one thing is certain: More spending is needed. 

Trump routinely demands that NATO countries spend more on defense — preferably by buying American weapons. So if they’re going to appease Trump, that’s the only way to do it. 

Of course, if Trump is simply determined to abandon NATO, then Europe will have to ramp up defense spending even further to compensate for America’s withdrawal. 

That would be a tall order. 

Replacing America’s weapons and troop presence in Europe would cost roughly $1 trillion over 25 years according to the International Institute for Strategic Studies.

In the meantime, though, NATO has agreed to significantly raise its defense spending target from 2% to 5%. The agreement calls for at least 3.5% of national GDP to be spent on core military needs, while an additional 1.5% can be allocated for related expenditures.

It’s a firm, explicit commitment to a trend that was already in place.

Indeed, a record 24 of 32 NATO members met or exceeded the alliance’s 2% defense spending guidance last year, up from just three in 2014. And some members — those nearest and most concerned with Russia’s aggression — exceeded it.

Poland leads by that measure and it’s not even close, as the country is the only NATO member that spends more than 4% of its GDP on defense. Latvia, Greece, Estonia, and the United States all spend 3.0%–3.5%. 

The majority (17 countries) spend 2.0%–2.5% and just eight spend less. As a result, the average defense spend for a NATO country is 2.7%, well ahead of the bloc’s 2% target.

Still, officially moving the target will put more pressure on the laggards to step up — or at least not slack off. 

Inevitably, that money will end up in the hands of American defense contractors, because Europe does not have the technology or capacity to replace American weapons systems domestically.

That’s why defense majors like Lockheed Martin (NYSE: LMT), RTX (NYSE: RTX), and Northrop Grumman (NYSE: NOC) are reaching out to European partners in a new bid to improve Europe’s manufacturing base and supply chain.

Paula Hartley, vice president and general manager of tactical missiles for Lockheed’s Missiles and Fire Control unit says her company is looking to expand European production across its “entire portfolio.”

“As demand increases, we see both the value and the benefits of expanding from purely domestic [production] to taking advantage of international supply chain and international facilities,” she said at the Paris Air Show last week.

To that end, Lockheed is starting up discussions to establish production of the Patriot PAC-3 missile in Europe, adding a third source of production outside of the United States and Japan. 

Poland has already signed up to be the first country outside the United States to produce Javelin anti-tank missiles. And it could soon host manufacturing facilities for the Guided Multiple Launch Rocket System (GMLRS) as well.

Lockheed is also looking to expand its production throughout the United Kingdom.

Raytheon, meanwhile, recently announced a memorandum of understanding with Germany’s Diehl Defence to co-produce the Stinger anti-aircraft missile in Europe.

Raytheon is also exploring deeper partnerships within the EU to meet demand for Patriot missiles.

Recent large-scale orders from Germany and Switzerland, among others, have contributed to a multi-year demand backlog for more than 1,000 Patriot interceptor missiles.

So while Iran may be the story du jour this week, Europe is where the money is at. 

There’s even been talk of a European missile shield akin to the Iron Dome in Israel — or the Golden Dome President Trump is pursuing on behalf of the United States. 

That could lead to a massive revolution in share prices for the defense contractors involved. Especially this one, here, which I featured in my latest report.