Defense Stocks Plummet After Booming Amidst Global Conflicts
Translated & summarized from Globes by baba
Defense stocks on the Tel Aviv Stock Exchange have fallen significantly after a period of rapid growth fueled by global conflicts. The defense index has dropped 20% in the last three months, with major companies like Elbit Systems and Next Vision losing substantial market value. Analysts cite profit-taking and concerns over inflated valuations, but some see current price drops as creating attractive investment opportunities for companies with strong competitive advantages.
The story in 6 lines · by baba
- Defense stocks have seen a significant downturn after booming due to global conflicts like "Swords of Iron."
- The Tel Aviv Stock Exchange's defense index has fallen 20% in the last three months.
- Four major defense companies have lost a combined 75 billion shekels from their peak valuations.
- Next Vision lost over half its value, partly due to a divestment by the US fund Fidelity.
- Analysts believe profit-taking and concerns about inflated stock prices are driving the decline.
- Some analysts see current price drops as creating attractive investment opportunities in the defense sector.
Defense stocks, which saw significant gains during the "Swords of Iron" war and the conflict in Ukraine, have experienced a sharp downturn in recent months. This shift follows a period of substantial growth, with some stocks soaring by hundreds or even thousands of percent, driven by increased demand for defense products and a global arms race. However, the trend reversed as military conflicts globally lessened and concerns grew about inflated stock prices.
The Tel Aviv Stock Exchange's defense index, launched late last year, initially surged by approximately 62% by mid-March. Since then, it has fallen by about 20% in the last three months, contrasting with a slight 0.2% rise in the broader TA-35 index. Overall, the defense index shows a negative return of 11% since its inception, while the TA-35 has gained 22%.
Analysts attribute the decline to profit-taking after years of strong performance, with actual company results potentially not meeting investor expectations. "We are seeing a change in valuation, with the multiples investors are willing to pay for companies, against the understanding that expectations ran faster than actual performance," stated Ilya Peiner, an analyst at Leader Capital Markets. Elad Salomon, a senior analyst at IBI Portfolio Management, added that the market is moving from general pricing to investors scrutinizing the quality and sustainability of companies' growth.
Four major defense companies on the Tel Aviv Stock Exchange, Elbit Systems, Next Vision, Israel Aerospace Industries (IAI), and Aries, have collectively lost 75 billion shekels from their peak valuations earlier this year. Aries Industries, a fuse manufacturer, dropped nearly 80%, losing 6 billion shekels. Next Vision, a stabilized camera manufacturer, lost over half its value, approximately 19 billion shekels, partly due to a significant divestment by the US fund Fidelity. Elbit Systems, the largest defense company, fell 34%, losing 48 billion shekels, while IAI's stock decreased by 22%, shedding 2 billion shekels.
Despite the recent declines, analysts see potential investment opportunities. Peiner suggests that long-term demand trends remain positive and that well-positioned companies with strong competitive advantages, like Elbit Systems, are likely to continue growing. Salomon views Next Vision as a potential opportunity due to its strong competitive edge and product in a high-growth sector, though he cautions about the risk and the need to maintain its advantage.
