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This year’s Stocks and Shares ISA deadline is looming and I’m wondering whether to top up my stake in FTSE 100 defence giant BAE Systems (LSE: BA).
Its shares have actually retreated in recent months, which suggests this could be a real buying opportunity. But what’s going on?
One year ago, the shares were flying as military spending surged due to conflicts in Ukraine and Gaza. BAE Systems’ full-year 2023 profits hit £2.7bn on record sales of £25.3bn.
This left me with a problem. I was desperate to add the stock to my self-invested personal pension (SIPP) but feared the BAE Systems share price would run out of juice the moment I took the plunge.
Can this stock take wing?
And that’s pretty much what happened. I bought BAE on 7 March at £12.75, and again on 10 May at £13.85. Down it went.
At today’s price of £11.71, I’m sitting on a paper loss of around 12%. Sod’s law strikes again, but also gives me an opportunity to average down on the price of my stake.
BAE Systems isn’t exactly cheap, with a price-to-earnings (P/E) ratio of 18.26. But it’s cheap by its own high-flying standards. I bought when it was trading at almost 23 times. That broke a golden rule but I was happy to do so as the board had worked hard to close the valuation gap between its US rivals. I just wish other FTSE 100 companies had been as successful.
So what went wrong? As far as I can see, it’s that P/E that went wrong. It prompted Bank of America Merrill Lynch to downgrade the shares from Buy to Neutral in May, and to Underperform in November. The broker also cited fears of potential US government spending cuts overseen by Elon Musk’s Department of Government Efficiency (DOGE).
President-elect Donald Trump is demanding NATO members spend more on defence, which should be good for BAE Systems. However, Trump also wants the US to spend less. Given the need for the US to display military might as China rearms, I suspect he’ll only take that thinking so far.
A great long-term buy-and-hold?
BAE Systems still has a massive long-term order book, boosted by the Aukus pact between Australia, the UK and US, to build the next generation of nuclear-powered attack submarines. It’s also benefitted from the global combat air programme between Italy, Japan and the UK to build a new fighter jet.
A lot now depends on Trump’s attitude to Vladimir Putin’s Russia. Until recently, many expected him to press an unfavourable peace deal on Ukraine, but there are signs his thinking may have changed and he might be tougher on Putin.
Either way, if the war is brought to a close, this could hit defence stocks across the board. With the Middle East uncertain, and fear growing over Chinese intentions towards Taiwan, that’s only likely to be a short-term setback.
Despite my initial disappointment, I’m convinced my BAE Systems shares will prove a brilliant buy in the longer run. I’ll see what Trump does after he enters the White House with a view to building my stake in BAE Systems before the 5 April Stocks and Shares ISA deadline.
