In 2018, then-president Donald Trump instructed the Department of Defense to set up a sixth branch of the U.S. Armed Forces -- a Space Force separate from the Air Force. Eighteen months later, the U.S. Space Force came into being when half of the U.S. Space Command and Air Force Space Command's (AFSPC) 35,000 civilian and military employees moved over to form the new service.
That number has since consolidated to about 14,500 total "Guardians" comprising USSF, of which fewer than 10,000 are active-duty military. But the Space Force could get a bit bigger soon. Because as the 2024 campaign season heats up, presidential candidate Donald Trump has called for the creation of something new: A Space National Guard.
Image source: Getty Images.
Uncle Sam wants you (to go to space)!
Currently, the Space Force draws on Air National Guard units to supplement its ranks. Military Times estimates about 10% of Guardians serving the Space Force are actually drawn from the Air National Guard.
Now, the Air Force doesn't like this arrangement and has suggested that the Space Force recruit more full-time Guardians rather than drawing part-time support from the ANG. But speaking at the National Guard Association conference in Detroit last month, Trump proposed an alternative. He argued it's time to create an independent Space National Guard to complement the Space Force.
This idea isn't novel. There are actually two bills working their way through Congress that would establish a Space National Guard "as the primary combat reserve component of the Space Force." But the Biden administration opposes this idea, advocating instead for the Air Force's plan to simply enlarge the Space Force.
But if there's one thing both political parties already agree on, it's that the Space Force is destined to grow and will require more resources as time goes on. In a constrained national defense budget, growth in the Space Force will logically come (to some extent) at the expense of growth in the Air Force.
And herein investors may spot an opportunity. Because if one service shrinks and the other grows -- or simply grows faster -- defense stocks emphasizing space over aerospace will presumably benefit more.
How to invest in space (forces)
What are these growing space companies, you ask?
I write a lot about space, and about defense, and I pay close attention to where these two domains overlap: defense contracts awarded for space services. Over the past few years, I've seen which defense companies are expanding their space businesses and raking in defense contracts relevant to growth in the Space Force -- and which companies are losing. Among America's biggest defense stocks, I'd say Huntington Ingalls (HII 0.25%), Textron (TXT -0.08%), and especially Boeing (BA -1.15%) are the three companies least relevant to an expanding Pentagon focus on space.
In contrast, Northrop Grumman (NOC -0.04%), L3Harris (LHX 1.15%), and Lockheed Martin (LMT -0.09%) are the three companies that are winning. All three are prime beneficiaries of the Space Force's Proliferated Warfighter Space Architecture missile defense project, for example. In addition, both Northrop Grumman and Lockheed Martin have sizable rocket launch businesses (Lockheed's being run through its 50% ownership stake in United Launch Alliance), while L3Harris owns maker of rocket engines Aerojet Rocketdyne.
General Dynamics (GD 0.90%), meanwhile, is something of a wild card. On the one hand, the company's primary defense focus is on ground and naval warfare. On the other hand, General D has built a profitable niche in space as well, just this past week winning a $492 million follow-on contract to build ground stations to process data supplied by the Northrop, L3, and Lockheed satellites orbiting above.
Where to invest in space
None of these four big "space defense stocks," however, are particularly cheap. Valuations range from a low of about 20 times earnings (not absurdly expensive, but no great bargain) at Lockheed Martin to well over 30 times earnings at L3Harris and Northrop. At 23 times earnings and with a 14% long-term projected growth rate, General Dynamics is probably the closest thing to a bargain in the bunch -- but at a 1.6 PEG ratio, even General D looks pricey to me.
As things stand today, I honestly can't recommend any of these defense stocks. But time marches on, and valuations change. What's expensive today may be cheap tomorrow.
If you're looking for a good space stock to invest in, well, at least now you know where to look when valuations become more appealing.
