Three Australian defence stocks to keep on the radar
By Dale Gillham
Australia's defence budget has taken a significant leap with the government's recent announcement of a $7 billion missile deal with the United States.
This deal underpins Australia's commitment to modernising its military, focusing on missile defence, cybersecurity, and space technologies.
With such a major investment, it raises the question: which stocks could stand to benefit from this surge in defence spending?
Before diving into specifics, it's important to put the $7 billion deal into context. Australia's defence budget has been on the rise, currently at about 2.02% of GDP, with a target to reach 2.3% by 2033-34.
While this is smaller than the United States (3.4%) and China (1.7%) relative to their GDP, Australia's investment in advanced, high-tech solutions is steadily growing, indicating continued expansion in the defence sector over the next decade.
This missile deal, along with the expected growth in defence spending, opens significant business opportunities for Australian defence companies through government contracts.
So, which companies are worth keeping on your radar?
Electro Optic Systems (EOS)
Specialising in space and missile defence systems, EOS is well positioned to benefit from increased government funding.
The company has already secured several contracts and its stock price has surged 400% since March 2023.
Currently trading between $1.20 and $1.80, a breakout above $1.80, especially with new funding news, could signal a strong bullish trend.
Austal Limited (ASB)
As a leading defence shipbuilder, Austal stands to gain from the government's focus on naval capabilities, particularly in missile-equipped vessels.
The company was recently awarded a $670 million contract, pushing its stock price above a key resistance level at $2.80.
While a short-term retest of that level is possible, Austal may be on track to challenge its all-time high of $4.99.
Codan Limited (CDA)
Specialising in communication systems, Codan is well positioned to benefit from rising demand both domestically and internationally as defence infrastructure and secure military communications are upgraded.
The stock has demonstrated impressive growth since 2022, gaining more than 300%, with only about 20% remaining before it reaches its all-time high.
Therefore, waiting for a pullback could present a safer buying opportunity for medium to long-term investors.
What are the best and worst-performing sectors this week?
The best-performing sectors include Consumer Staples, up more than 1%, followed by Communication Services, up under 0.5% and Financials, slightly down under 0.5%.
The worst-performing sectors include Information Technology, down more than 7%, followed by Healthcare and Real Estate, both down more than 1.5%.
The best-performing stocks in the ASX top 100 include Qantas, up more than 7%, followed by Evolution Mining, up more than 3% and REA Group, up more than 2.5%.
The worst-performing stocks include Mineral Resources, down more than 21%, followed by WiseTech Global, down more than 18% and Reece Limited, down more than 7%.
What's next for the Australian stock market?
With the All Ordinaries index down more than 1% this week, the long-awaited sellers have finally arrived just in time for Halloween.
While market declines are rarely welcomed, as I mentioned in my previous report, healthy selling is crucial for sustainable long-term growth.
As such, I expect the All Ordinaries to continue with short-term selling over the next week or two, potentially finding support between 8,300 and 8,100 points.
If the declines intensify, particularly with the volatility expected as we near the US election, support around the 8000-point level may come into play.
What's particularly interesting this week is the Financial Sector breaking through to a new all-time high, signalling that its stellar run since the start of the year still has momentum.
If you think financials have run out of steam, think again. Betting against strong trends can be risky while riding them out often presents some of the best trading opportunities.
Therefore, it could be a good time to revisit the sector and identify stocks poised for further gains.
Also, it's worth remembering that downside volatility is common in October, so don't be too quick to close out positions that may be stalling for now.
Historically, post-US election price movements have offered strong upside momentum, which could bring more gains in the near future.
For now, good luck and good trading.
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