The best defence begins at home – Investors' Chronicle – Investors Chronicle

In our last article, we looked at a selection of smaller UK-listed defence businesses. These companies’ narrower operating bases have tended to create more volatile share prices. For more stability, investors might prefer the UK’s larger defence stocks. The pool is small, and shrinking following takeovers at Ultra (ULE) and Meggitt (MGGT) – there are today barely half-a-dozen options. The bulk of investible value remains in the US, where the market value of some individual defence businesses are worth a multiple of the entire listed UK defence sector. We will look at US stocks in our final article on this subject. 
In the UK, we have a mix of defence pure plays, those that have a defence arm, and those with a tangential connection to defence. Let’s begin with the last of these three categories: in this group are Darktrace (DARK) and Serco (SRP), but caution is needed here as drivers other than defence are likely to be more important to these companies’ performance. 
Darktrace’s focus is cyber security, a key area of modern warfare. A problem here for investors is that Darktrace is bound by confidentiality agreements, making it difficult to see the scale and location of contracts in the defence arena. However, work for other defence contractors and direct engagement with governments or arms of the military is likely to be a material part of the client portfolio. The company, after a sharp drop in the past year, now looks good value – but not really because of higher defence spending.
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