US Military Power Depends on This Fastest-Growing Defense Stock

Stephen McBride  |

You’ve likely seen kids playing with toy drones at the local park…

The US military also employs drones, but they are different animals. They can glide through the sky at 300 miles/hour, carry 4,000 lbs. of bombs, and cost up to $17 million apiece.

American military power relies on drones these days. In fact, the US Air Force now recruits more drone pilots than actual pilots!

And one little company makes the “brains” of these important machines.

It’s growing faster than any military stock I’ve ever seen. And it’s set to soar as it wins billions of dollars in defense contracts over the next few years.

Do you know how much money the US government paid its top four defense contractors last year?

It paid Lockheed Martin LMT, Boeing BA, Raytheon RTN, and Northrop Grumman NOC a staggering $118.1 billion.

For perspective, that’s roughly what internet giant Google GOOGL—the world’s fourth-largest publicly traded company—raked in last year.

And the companies drinking from this firehose of government money have been great investments.

This chart shows the top four US defense stocks vs. the S&P 500 since 2013:

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You can see that shareholders have made a killing on the back of all those defense dollars.

The US government, as you may know, is the world’s biggest spender. This year it’ll shell out a record $4.7 trillion.

While this is nauseating for tax payers, it’s great for companies that sell products and services to the government.

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These days one of the surest ways to get rich is to figure out how to tap into the never-ending flow of government cash.

Lockheed Martin and Boeing have figured it out. As the two largest military contractors, they’ll collect $72 billion from the US government this year alone.

Both have crushed the S&P 500 for many years. But I’m not recommending you buy either today.

Instead, I’m recommending a little company 1/70th the size of Boeing that’s shaping the future of warfare.

Its chips power all the American military’s largest and most deadly drones.

They also enable other high-tech equipment like Patriot missiles, F-16 fighter jets, and the Navy’s “track and destroy” combat system.

Computer chips are one of the most disruptive sectors today. In fact, a computer chip stock is one of my three favorite disruptor stocks for 2019.

Mercury’s MRCY chips give drones a God-like view of the terrain below. They allow the drones to process what its cameras see in real time.

This helps them to pinpoint the location of suspects, track multiple vehicles, and make absolutely sure they’ve homed in on the right target before launching a deadly attack.

The US military controls a fleet of 11,000 of drones, compared to just a handful 20 years ago. In fact, drones make up over half of Department of Defense aircraft today.

Spending on drones is growing faster than any other military program. It will hit a record $9.5 billion this year.

Drones are part of the rapidly growing “defense electronics” market. Leading aerospace research firm Renaissance Strategic Advisors estimates this market will grow to $117 billion in just three years.

Mercury Systems is growing into a dominant player in defense electronics. Yet it’s worth just $2.9 billion—too small for inclusion in the S&P 500.

This combination—small firms disrupting large markets—is exactly what I look for. These are the kinds of stocks that could double or triple quickly and still have lots of room to grow.

Mercury is on pace to earn $500 million in sales this year. Even if it grows sales 10x, it would still control less than 5% of its target market.

Mercury is set to collect billions more as it wins military contracts in the coming years.

As I mentioned, defense companies that sell to the US government have been great stocks to own.

Well, in the past five years, Mercury’s performance has crushed all those big defense stocks. You can see how Mercury has outperformed them by 2x, 3x, 4x on this chart:

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It has achieved these gains by growing sales 163% in the past three years. That’s 6.5x faster than Lockheed Martin, and 8x faster than Boeing.

As I said, it’s the fastest-growing military stock I’ve ever seen.

Mercury Systems has been on a tear since the start of the year, soaring 24%. Because it has climbed so quickly, I wouldn’t be surprised if it takes a short-term breather soon.

But as military spending on drones and other cutting-edge equipment explodes over the coming years, I see Mercury’s stock climbing much higher.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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