On Jul 22, President Trump and leaders of the U.S. Congress announced that they have reached a crucial agreement on the federal budget and debt ceiling. The agreement is being viewed as an unexpected win for the pragmatists on Capitol Hill. For some time now, they have worked to prevent a government shutdown or the first federal default.

Trump was quick to hail the deal as a victory, especially for the armed forces. And in many ways, it is, though not as much as congressional Republicans would have wanted. Be that as it may, the agreement guarantees a significant increase in defense funding next fiscal. This is why it makes sense to stock up on defense stocks now.

Hard Bargaining Leads to “Near-Final” Deal

Weeks of tense negotiations have led to an agreement, which fails to meet the expectations of all parties involved. At the same time, it addresses key concerns, which is why Republicans are likely to claim a victory. In effect, the bipartisan deal suspends the U.S. debt ceiling and raises expenditure limits for the next two years.

The House of Representatives must approve the deal this week itself since a six-week recess commences from Jul 26. However, the Senate can vote on the agreement to vote as late as next week. In a statement on Monday night, the White House urged both houses of Congress to “quickly move this deal to the president’s desk for signature.”

Trump seemed thrilled with the deal stating that no “poison pills” would be forced into follow-up legislation. “This was a real compromise in order to give another big victory to our Great Military and Vets!” he tweeted. The deal broadly agrees to approve $1.37 trillion in agency spending in 2020 with a modest increase the following year.

Defense Spending Receives Major Boost

As a result of the deal, the Defense Department is likely to receive a major increase in funding in the next fiscal year. Since the agreement does away with the last two years of budget caps, also known as sequestration, military expenditure is set to clock in at $738 billion in fiscal 2020. This represents a year-over-year increase of 3%.

Nitpickers will point out that the figure is almost $12 billion lower than the level congressional Republicans had demanded. They have maintained for long that this level of spending is required to rebuild the armed forces and counteract threats to national security.

But it is at least much more than the lower $733 billion funding target that the Democrats were insistent about. This is why hawkish Republicans have agreed to support the new spending deal. According to a senior member of the House Armed Services Committee, while the country’s defense “needs more funding than this agreement provides,” the approved level will still make U.S. armed forces “stronger and more agile.”

Our Choices

The new budget deal is being touted by Trump as a major victory for the armed forces. This is true to a great extent since the military spending approved under this plan exceeds the figure Democrats were insisting on till recently. As a result, spending on defense will rise significantly in the near future.

Investing in defense stocks looks prudent at this point. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Lockheed Martin (LMT - Free Report) is the largest defense contractor in the world. Its main areas of focus are in defense, space, intelligence, homeland security and information technology including cybersecurity.

Lockheed Martin flaunts a Zacks Rank #1 (Strong Buy). The company’s expected earnings growth for the current year is 16.7%. The Zacks Consensus Estimate for current-year earnings has moved 0.1% north over the past 30 days.

HEICO Corporation (HEI - Free Report) is one of the world’s leading manufacturers of Federal Aviation Administration (“FAA”)-approved jet engine and aircraft component replacement parts.

HEICO’s expected earnings growth for the current year is 23.8%. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the past 30 days. It sports a Zacks Rank #1. 

Teledyne Technologies (TDY - Free Report) serves the markets of aerospace and defense, factory automation, air and water quality environmental monitoring, electronics design and development, oceanographic research, deepwater oil and gas exploration and production, and medical imaging and pharmaceutical research.

Teledyne has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 7.9%. The Zacks Consensus Estimate for current-year earnings has moved north by 1.9% over the past 60 days.

Wesco Aircraft Holdings, Inc. (WAIR - Free Report) distributes and provides supply chain management services to the global aerospace industry.

Wesco Aircraft Holdings has a Zacks Rank #2. The company has expected earnings growth of 13.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 1.2% over the past 30 days.