Defense Contractors to Buy to Benefit from AI

Defense contractors to buy to benefit from AI are providing the U.S. military with cutting-edge advances that can speed up production of weapons, missiles and other goods and services needed to protect freedom.

The defense contractors to buy to benefit from Al, also known as artificial intelligence, each have unique niches that offer quasi-barriers of entry for would-be competitors. The defense contractors give investors an alterative to technology stocks that showed weakness Tuesday, Feb. 3, when The Wall Street Journal reported that a pair of S&P indexes that track software, financial data and exchange stocks lost a combined market value of around $300 billion.

To avoid the worst of market downturns, Bryan Perry, a veteran Wall Street money manager and the leader of the Cash Machine investment newsletter, said investors can find places of refuge that include less well-popular investments. Examples include defense companies and income investments he chooses for his Cash Machine subscribers that offer high-dividend yields.

“The blended yield of just over 10%, spread over 26 holdings that all pay monthly dividends and distributions, is providing a major cushion to the uncertainty surrounding Fed policy, White House policy, Congressional policy and global headline risk,” Perry told me about his Cash Machine publication.

Perry said his alternatives are “trading very well” against what is a volatile investing landscape for some of the sub-sectors of the high-yield universe. In the Feb. 3 Cash Machine hotline, which offers a weekly update about his monthly newsletter’s recommendations, he wrote that his choices of convertible debt, mortgage REITS, preferred stocks, emerging market debt, covered-call closed end funds, covered-call ETFs, investment grade bonds, tax-free bonds, energy infrastructure and gold continue doing well.

Bryan Perry heads Cash Machine.

Defense Contractors to Buy to Benefit from AI: Palantir

Even though software companies once seemed posed to thrive with AI, they now may be disrupted. However, at least one software company became an exception on Feb. 3 by rising when others were falling.

As a provider of cyber security to the U.S. military, Denver-based Palantir Technologies Inc. (NASDAQ: PLTR) gained a big boost from a new federal contract to ascend 11.8% after the market closed on Monday, Feb. 2, by 3:16 a.m. ET when I checked on it in the middle of the night.

Palantir Technologies held most of that gain, Tuesday, Feb. 3, despite the huge drop for some other software companies. The share price of Palantir finished trading on Feb. 3 with a gain of 6.84% on Feb. 3, after the company topped Wall Street’s fourth-quarter estimates amid increased spending on artificial intelligence capabilities from governments and businesses.

However, the market’s waning love for software stocks caught up with Palantir on Wednesday, Feb. 4, when a sell-off of stocks in the sector took Palantir along for the plunge with the company’s share falling more than 13% as I finalized this column that afternoon.

Even so, several Wall Street analysts issued research reports this week reaffirming buy ratings on Palantir. The stock’s steep drop may be causing nervous investors to capitulate and sell, leaving a potential rebound for those who can afford to be patient.

“It is an absolute juggernaut of a stock, and it makes the most sophisticated software used to combat threats to both individuals and government and other organizations,” said seasoned investor Jim Woods, a former Army officer and paratrooper who heads the Forecasts & Strategies investment newsletter after it merged with the Investing Edge newsletter that he previously led. “The company has posted a three-year annual earnings-per-share (EPS) growth rate of an incredible 109%, which has helped vault it into the top 1% of all companies on an EPS growth basis.”

Jim Woods now heads Forecasts & Strategies

Palantir seeks to operate as the “connective tissue” between Army personnel, data and resources by delivering critical information to the key decision-makers when needed, company officials stated. Its technology enhances the preparedness of soldiers who use wearable sensor and mobile technologies in the battlefield.

But the huge amount of data produced risks overwhelming both the individual soldiers and the battlefield decision-makers who lead them. Palantir tries to harness hardware solutions, reduce system complexity and provide improved human-machine interfaces to aid soldiers in the field and commanders at a forward-operating base (FOB). Situational awareness powered by visual augmentation, sensor optimization and secure capabilities helps to reduce cognitive challenges, as well as to protect and to connect warfighters.

The U.S. special forces who located al-Qaeda founder Osama bin Laden‘s compound in Abbottabad, Pakistan, where he was killed on May 2, 2011, are rumored to have used a Palantir software product called “Gotham” with the help of counterterrorism analysts at U.S. government agencies to integrate and analyze critical data. The information could have included intelligence reports, surveillance and reconnaissance.

When it comes to military operations, aggression, manpower and firepower still require the right intelligence to win battles, Woods said. Palantir had been the star performer in the Top 10 Growth Accelerators portfolio of Investing Edge. The recommendation has been added to Forecasts & Strategies this week.

Chart courtesy of www.stockcharts.com.

The earnings beat came as welcome news for Palantir’s shareholders after the stock endured its worst month in two years during November 2025 amid a broad decline in software stocks about a possible AI valuation bubble. Palantir’s shares finished up 135% in 2025 but had slipped 17% through the close of trading Monday so far in 2026. It gives investors who missed buying Palantir a chance to do it now at a discount to its previous price as much more military business seems inevitable.

“We have upgraded shares of Palantir ahead of earnings following its recent 30% selloff, as our Dotted Line government tracker and our separate commercial tracker indicate that Palantir’s momentum has continued,” wrote Louie DiPalma, who rates Palantir as “outperform” despite the volatility. “The new administration continues to go all-in with Palantir and enterprises are adding workflows.”

The recent selloff creates a “buying opportunity” for Palantir as a leader in the AI supply chain, DiPalma added.

Defense Contractors to Buy to Benefit from AI: SkyWater

Quantum computer pioneer IonQ recently announced an agreement to acquire SkyWater Technology (NASDAQ: SKYT), the largest U.S.-based specialty semiconductor foundry, for approximately $1.8 billion. SkyWater Technology shareholders will receive approximately $35.00 per share in total consideration, a nearly 50% premium to its closing price on December 31, 2025.

The reasoning for IonQ’s acquisition seems understandable to John Schroeter, who is a senior analyst for the Gilder’s Moonshots advisory service that had recommended SkyWater since its early stage to deliver what will be a return of three times the initial investment to its clients. The deal, which was unanimously approved by both companies’ boards, is expected to close in the second or third quarter of this year.

“The acquisition creates the first vertically integrated quantum computing company with domestic fabrication from design through production,” Schroeter wrote to Moonshots‘ clients last Friday, Jan. 30.

SkyWater holds Defense Microelectronics Activity (DMEA) Trusted Foundry accreditation and operates facilities in Minnesota, Florida, and Texas. After the deal closes, it will continue serving commercial and government customers while becoming IonQ’s in-house manufacturer.

“The transaction exposes quantum computing’s actual industrial requirements,” Schroeter wrote. “Quantum hardware benefits from larger geometries and stable processes — the opposite of advanced logic nodes. SkyWater’s foundational nodes — 90nm to 350nm) — outperform cutting-edge processes for quantum applications. IonQ bought manufacturing capability aligned with physics rather than chasing transistor density (quantum will never follow Moore’s Law).

“IonQ’s strategy of vertical integration functions as insurance against long development timelines and technical uncertainty. Owning fabrication shortens iteration cycles and eliminates dependency on external foundry priorities. The structure trades fixed costs for strategic control — appropriate when commercial adoption remains years away and government contracts are the primary revenue driver.”

Schroeter further wrote that IonQ will operate as a “sovereign” technology provider, delivering quantum systems through entirely domestic, secure supply chains critical for defense and intelligence work where foreign dependencies are prohibited. Trusted Foundry status and domestic supply chains position the company for defense and intelligence work where supply chain security determines access, he added.

Government-related revenue provides durability even if there are contract delays, which is sometimes the case, Schroeter continued. It also introduces defense contractor economics: linear growth, negotiated margins, and valuation based on program backlogs rather than platform multiples, he added.

The deal puts pressure on competitors, Schroeter counseled. PsiQuantum relies on SkyWater for silicon photonics manufacturing. Its future fortunes now depend on a competitor-owned foundry, he added.

“Other quantum companies using SkyWater face similar questions about supply chain risk,” wrote Schroeter, who works closely with technology futurist George Gilder. “The concentration of specialized fabrication inside IonQ may force consolidation across the field.”

The shares of SkyWest continue to trade below the agreed-upon sales price approximately $35.00 per share until the deal closes. After a 6% drop with on Feb. 4 with less shortly before the market’s close on Feb. 4, the stock is slightly above $29 per share. That leaves about 20% upside if the deal closes at the projected price later this year.

To avoid any further risk, Gilder’s Moonshots advised its clients to sell their shares last on Jan. 30 to capture a three times returns on investment right away.

Chart courtesy of www.stockcharts.com.

Defense Contractors to Buy to Benefit from AI: Raytheon

Arlington, Virginia-based RTX Corporation (NYSE: RTX), the successor defense company to Raytheon, is continuing to build momentum with recent announcements of two new government contracts. Investors responded favorably to the reports and bid up the company’s share price by 1.20% on Tuesday, Feb. 3. The share price was down more than 2% late in the day on Wednesday, Feb. 4.

The stock is a favorite of Michelle Connell, who heads Dallas-based Portia Capital Management. As a money manager, Connell helps foundations, charities and individuals find the find strategies for their respective levels of risk tolerance.

A big contract to support the FAA’s Radar System Replacement Program went to RTX in June 2025. That program is part of the Department of Transportation’s new air traffic control system, replacing 612 current radar systems with next-generation surveillance radar at airports with high passenger and cargo volumes.

The target date for the replacement is June 2028. The FAA is expected to spend $6 billion on the program by the end of 2026, and a total of $12.5 billion by June 2028. RTX’s side of the contract is estimated to be around $438 million.

More recently on December 22, 2025, Raytheon, now a division of RTX, announced that Spain had placed an order for $1.7 billion of Patriot systems and missiles. That marked the largest Patriot order ever placed by Spain.

“Given the current escalated level of global geopolitical tensions, I would expect RTX to announce more defense contracts with the EU and possibly other regions,” Connell said.

In addition, RTX reported a stellar fourth quarter last week, Connell said. The company beat earnings and revenue expectations, and its free cash flow of $7.9 billion more than doubled from $3.4 billion last year, Connell added.

RTX’s current $268 billion backlog gave its management the confidence to increase the company’s guidance for 2026.

“RTX’s current dividend yield is 1.45% and is growing almost 8% annually,” Connell told me. “Based on its optimistic conference call this week, I would expect RTX to continue to deliver 8% dividend growth over the long-term.

“Over the past 12 months, RTX is up over 59%. I anticipate RTX to generate over $8 billion of free cash flow in 2026 and believe there is more upside for the stock, I would average into the name.”

Chart courtesy of www.stockcharts.com.

Defense Contractors to Buy to Benefit from AI: Geopolitical Risk

Geopolitical risk remains a factor for investors to weigh. At least with stock involved in the defense industry, their businesses can benefit from increased military spending.

With software and other technology stocks losing luster with investors lately, defense contractors may can appeal. The needs of governments around the world to protect the freedom of their nations only seem to be on the rise.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz.