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It’s been an incredible start to the year for BAE Systems (LSE: BA) shares. That’s good news for me, as I bought the FTSE 100 defence manufacturer last year and immediately found myself nursing a 15% loss.
That’s pretty hard to do with this stock. BAE Systems has been steadily rising for years, but sod’s law dictated it would slump the moment I took a position.
That’s fine. It’s all part of the ups and downs of equity investing. I stuck to my thesis that the stock would prove its worth as geopolitical tensions forced the West to rearm. It was only a matter of time. And that time appears to be now.
A wake-up call for NATO
US president Donald Trump’s public spat with Ukrainian President Volodymyr Zelenskyy was the catalyst. It sparked urgent discussions among European leaders over the weekend.
By Monday (3 March) morning, it was clear that Europe had woken up. Some leaders began calling for NATO members to spend 3% to 3.5% of GDP on defence, while others pushed for greater European military independence from the US.
BAE Systems shares rocketed more than 20% on the day and have continued climbing. As a result, an investor who put £10,000 into BAE Systems at the start of the year would now be sitting on a share price gain of exactly 40%, before trading charges. That would have turned their £10k into £14,000. A brilliant return. Personally, I’m now 22% to the good.
So much for recent history. The one thing every investor wants to know is: what happens next?
On the bullish side, the global defence industry is booming. European nations are ramping up military spending, and BAE Systems, as one of the world’s largest defence contractors, is well positioned to benefit.
Has it got more scope to grow?
However, there are risks. If we get a peace deal in Ukraine (which we all hope for), or even a ceasefire that merely stores up trouble for later, defence stocks could slump. Alternatively, investors who piled in recently might take profits, dragging the share price down.
Then there’s the political risk. If PM Keir Starmer blocks US takeovers of UK arms firms, as he suggested, Trump could retaliate. Or he might not. It’s the uncertainty that’s one of the problems. He might threaten to ban the US military from procuring weapons from British companies. Even if he doesn’t retaliate, this would punish the BAE Systems share price.
Also, the stock isn’t exactly cheap, trading at a price-to-earnings ratio of almost 23. That’s well above the FTSE 100 average of just over 15 times.
The 15 analysts offering one-year share price forecasts have produced a median target of 1,533p. If correct, that’s a drop of around 5% from today’s levels.
Those forecasts were almost certainly arrived at before this year’s leap, so don’t reflect current concerns. But this also suggests BAE may have used up its growth prospects for the year. The stock could easily idle from this point. Or be volatile.
Given heightened emotions and potential profit-taking, I’d suggest investors tread carefully around the defence sector in the days ahead.
That said, I still believe BAE Systems remains an unmissable long-term buy-and-hold and definitely worth considering. Just watch out for sod’s law.
