Defense stock ranking in July: The one that jumped 14% and the one that fell 15%
July was green in almost every sector, but defense stocks were left behind. The relative calm in the security arena prevented them from participating in the market rally, and the 'return to the mean' rule barely worked here. Why didn't Next Vision recover, and what distinguishes Elbit Systems from the rest?
While most sectors on the stock exchange recorded a notable recovery in July after the red month of June, defense stocks provided a significant exception. The Tel Aviv Defense Index closed almost unchanged, with a negligible decline of 0.42%, while the broader market surged.
The explanation lies in the inverse mechanism that characterizes the sector: defense stocks feed on tension, and last month was mostly characterized by relative calm. The ceasefire with Iran held, and despite some warming towards the end of the month, there was no significant escalation that would bring investors back to the sector.
The result is a split picture. At the top of the ranking, TSG stood out with a jump of 14.48%, followed by the sector giant Elbit Systems, which recorded a nice increase of 8.93%. But from here on down, the picture is red: Next Vision fell 1.29%, Bet Shemesh Engines lost 1.96%, Ashot Ashkelon plummeted 7.71%, Arit Industries fell 8.25%, and at the bottom, Imco continued to fall sharply with another decline of 15.31%.
In sectors such as banking, insurance, and energy, we saw a clear phenomenon of "return to the mean" this month, where the very stocks that fell the hardest in June led the recovery. In defense, this rule barely worked.
Next Vision, which was the big loser of June with a drop of nearly 20%, did not recover and remained in the red. Imco continued to fall. While the falls in the banks were mainly a temporary panic reaction that reversed, the pressure on the defense companies is more fundamental. It stems from the fear of a slowdown in the pace of orders as the region calms down, and another month of calm only reinforces this fear instead of dispelling it.
Here lies the fundamental difference between Elbit Systems and the rest. Elbit does not depend primarily on local tension. It benefits from broad global diversification, a huge backlog of orders for years to come, and the trend of rearmament in Europe. Therefore, even in a month of local calm, investors continue to price in growth for it, while the smaller and more local companies, whose fate is directly tied to the Israeli defense budget and the intensity of the fighting, are left behind.
Although there was some warming at the end of the month, those same frictions that even contributed to the rise in oil prices did not reach the level of a real escalation. For the energy sector, even moderate tension is enough to move prices. For defense companies, on the other hand, much more is required: actual orders, increased defense budgets, and an actual round of fighting to justify the high valuation that has characterized them in the last two years.
Defense stocks took a central place in investment portfolios and pension savings following the war rally. July reminds us that they depend on what happens on the ground, and that a direction of calm, as good as it may be for the country and the economy, actually weighs on them.
