4 AI Defense Stocks Insiders are Loading Up On

While everyone's chasing Palantir at a nosebleed valuation, the actual money in defense AI is flowing somewhere else. Into the missiles, the radars, the secure networks, and the electronics that AI has to run on. The Pentagon just signed 7-year munitions deals worth tens of billions of dollars, and almost none of it is going to Palantir.

Here are 4 defense stocks that are getting that money instead. One has a $289 billion backlog. One is buying back nearly 10% of itself. And the last one just set records on every line of the income statement, with 5 insiders, including the CEO, buying stock the same day.

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Let's start with Palantir itself, because you need to understand what's already priced in before talking about what isn't.

P.S. Prefer to get these stock picks in video form? Get them here.)

Why the Palantir Ship Has Sailed

What Palantir (PLTR) built is real. They're the software layer between messy government data and decisions people can actually act on. That's valuable, and it's why the stock commands a premium.

But here's what the data says about it, and to explain that it helps to walk through what the Zen Ratings are, since they're the backbone of every pick today.

The Zen Ratings run 115 factors on every stock, the ones proven to drive stock price performance, and roll them into one grade from A to F. A is a Strong Buy, the top 5% of the market. B is a Buy. C is the middle 60%. Historically, A rated stocks have averaged close to a 30% annual return.

Here's where Palantir lands right now. An overall C. It ranks right near the middle percentile of more than 4,600 stocks, which is a fancy way of saying roughly half of the stocks tracked have better fundamentals.

The Zen Ratings also let you dig deeper with 7 underlying Component Grades to see specific areas of strength or softness. Its Value grade is a D, ranking in the bottom 11% of the market on that measure. The story is great. The price already reflects the story.

Palantir needs flawless execution to justify that multiple. The 4 picks below just need defense budgets to keep flowing toward AI enabled systems, which they are. The government's AI modernization work is going to contractors trading at 15 times earnings, not 200.

So let's get into it. First up, the missile defense prime…

Lockheed Martin (LMT)

Stock number 4 on the list is Lockheed Martin (LMT).

Lockheed is on this list because of one contract. At the end of July, the U.S. Army handed it a 7-year deal worth up to $58.6 billion for PAC-3 interceptors, the missiles that make the Patriot system work. It's the largest Patriot contract ever signed, and the plan is to triple production by 2030. A month earlier, Lockheed signed another 7-year deal, close to $35 billion, for THAAD interceptors.

And here's the AI angle. A missile shield is only as good as its brain. Tracking hundreds of incoming threats, deciding which interceptor goes where, and doing it in seconds is a machine learning problem before it's a rocket problem. Lockheed has been embedding AI into its radars, its command and control software, and its autonomy programs for years. When the Pentagon buys interceptors at 3 times the old rate, it's buying the AI layer that aims them, too.

The financials are catching up to the contracts. Trailing 12 month earnings are $6.3 billion, up a little over 50% year over year. Second quarter earnings came in at $1.8 billion, up more than 20% from the quarter before. Management raised its full year outlook to roughly $80 billion in sales and about $30 in earnings per share. And this is a company that has raised its dividend for more than 20 consecutive years.

Wall Street's best analysts see plenty of room from here. Gavin Parsons at UBS, top 20% of analysts tracked, upgraded Lockheed to Strong Buy on September 8th with a target more than 25% above the current price. Charles Minervino at Susquehanna, top 3%, has a Strong Buy with a target more than 30% higher. Interestingly, even Kristine Liwag at Morgan Stanley, top 10%, who only rates it a Hold, has a target nearly 30% above where it trades today.

Now the Zen Ratings. Lockheed earns an overall B, which is a Buy recommendation, and ranks in the top 7% of all stocks.

Looking at the Component Grades, the standout is the AI factor, where it ranks in the top 12% of stocks tracked. This doesn't measure how much AI a company uses, but rather it's the algorithm helping detect subtle signals of future outperformance. Value ranks in the top 8%, not a bloated valuation like Palantir. Financials, top 8%, a solid balance sheet. And Safety comes in at top 7%, exactly what you'd expect from a company that just added a 7-year, $58 billion order to the books.

One risk. The earnings history has been lumpy. Over the past 3 years earnings actually shrank around 17% a year, mostly from charges on classified programs. Those charges look to be behind them, but that's the thing to watch when they report on October 20th.

Here's what stands out most. Nobody is going to get excited about Lockheed at a cocktail party. That's the point. The market is pricing it like a slow moving defense prime, and it just locked in 7 years of demand for the exact product AI enabled missile defense runs on. Boring companies with $58 billion order books tend to surprise to the upside.

RTX (RTX)

Next up is RTX (RTX), the company most people still call Raytheon.

RTX is on this list because it owns the sensor layer of modern defense. Raytheon builds the Patriot radar and launcher that Lockheed's interceptors fly out of, plus the Tomahawk, the AMRAAM, and the sensors on almost every American ship and fighter jet. Modern radar doesn't just see things. It classifies them, filters out decoys, and hands targets to weapons faster than a human operator could. That's machine learning running on hardware, and Raytheon is one of maybe 3 companies in the world that builds it at scale.

Here's what that looks like in the numbers. Backlog is $289 billion, up more than 20% in a year, which is more than 3 years of revenue already signed. In the second quarter, sales grew 14%, and 16% organically. Adjusted earnings per share grew a little over 20%. Free cash flow was $2.9 billion in a single quarter. Margins expanded in all 3 segments, and management raised guidance across the board. Step back and the trend is clear: earnings grew 25% last year, roughly 80% a year over the past 3 years, and analysts see another 50% plus over the next 3.

This is one of the few large cap defense names where Wall Street consensus is a Strong Buy. 5 of the 9 analysts covering it say so. And they're not just randos. Kenneth Herbert at RBC Capital, top 2% of all analysts, has a target more than 25% above the current price. Charles Minervino at Susquehanna, top 3%, is at Strong Buy with more than 20% upside.

On the Zen Ratings, RTX earns an overall B, a Buy, and ranks in the top 6% of all stocks tracked.

Looking at the Component Grades, Growth ranks in the top 18%, that's the backlog converting into earnings. Momentum sits right alongside it, also around the top 18%, still solid even after last month's pullback. The stock is up nearly 30% over the past year, and the system thinks the trend has legs. And the standout of the three is actually the AI factor, in the top 16%, with the algorithm picking up signals of outperformance ahead.

One risk. It earns a Value grade of C, and for a very real reason. RTX trades at over 34 times trailing earnings, and when a quarter disappoints that premium compresses fast, which is what happened last month when the stock pulled back about 11%.

But look at what that pullback gave you. The same $289 billion backlog, the same raised guidance, the same Strong Buy consensus, about 11% cheaper than it was in July. When the fundamentals don't change and the price does, that's not a warning sign. That's an entry point.

The 2 stocks left are both rated A.

SAIC (SAIC)

For the penultimate pick, SAIC (SAIC), Science Applications International.

SAIC is on this list because it's the company the government actually calls when it wants AI. When the Army, the Navy, the Air Force, or the intelligence community needs to modernize a network, stand up a secure cloud, or build AI into a mission system, SAIC is often the one doing the work. They call themselves a mission integrator, and it fits. And they're leaning in. In April, SAIC put Paul Eremenko, a former Airbus chief technology officer and one of the better known AI engineers in aerospace, on its board, alongside Admiral Mike Rogers, the former head of the NSA. That's a board built for what the government is buying next.

Now the numbers, starting with this one. SAIC guides to more than $600 million of free cash flow this year on a market cap of about $5.3 billion. That's a free cash flow yield north of 11%. Second quarter results, reported August 31st, beat expectations and management raised full year guidance for revenue, margins, and earnings per share. Backlog is $22.1 billion. During the quarter they won a $400 million recompete with a U.S. intelligence agency and a $330 million Army contract for modeling and simulation, which is where a lot of defense AI gets built and tested. After the quarter closed, they added a $740 million Homeland Security award.

And they're using that cash. Diluted shares fell from 46.8 million to 42.8 million in a year, down nearly 10%, with $90 million of buybacks in this quarter alone. On the insider side, 2 executive vice presidents bought shares on the open market this year, in January and April. Those are small purchases, and insiders overall have been net sellers over the past 12 months, so the real buyer of SAIC stock is SAIC itself.

The analyst coverage on this one is a mixed bag. The consensus among 7 analysts is Hold, but several bullish voices are calling for 20% or greater upside in the coming year, as of this writing.

When Wall Street can't make up its mind, the Zen Ratings can help give a fuller picture. And in this case, the system disagrees with the fence sitters. SAIC earns an overall A, a Strong Buy, and ranks in the top 4% of all stocks. It's also the number 1 ranked stock in the entire Information Technology Services industry, out of 57.

Looking at the Component Grades, it's not hard to see why it earns that elite rating. Sentiment ranks in the top 13%, institutions are positioned in this stock even if the analysts aren't. The AI factor puts it in the top 16%. Safety ranks in the top 3%, which is what a $22 billion backlog of multi-year government contracts buys you. And the standout is Value, in the top 2% of all stocks. It trades at under 15 times earnings and about two thirds of sales. That's the opposite end of the spectrum from Palantir.

One risk. Bookings were light this quarter. Book to bill came in at 0.6, meaning they're burning backlog a bit faster than they're replacing it. The awards announced after quarter end will help, but it's the number to watch.

Here's the thing about a stock nobody on Wall Street wants to recommend. When the numbers finally force an upgrade, and an 11% free cash flow yield with rising guidance tends to do that, the move happens fast, because nobody is positioned for it.

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Astronics (ATRO)

Finally, the number 1 pick, Astronics (ATRO).

This one is a surprise. Astronics is a $3 billion company that most investors have never heard of. It's on this list for 2 reasons. First, it makes the electrical power systems, lighting, and connectivity hardware inside aircraft, plus automated test systems for military radios and electronic warfare equipment. Every smart sensor, every cockpit display, every onboard computer on an AI enabled aircraft needs clean power and a way to talk to the rest of the platform. That's Astronics.

Second, the insiders. On March 3rd of this year, 5 Astronics insiders bought stock on the same day. The CEO, Peter Gundermann, picked up shares worth about $1.1 million. The head of the Aerospace division bought close to $900,000 worth. Another insider bought over $900,000. Add it up and it's well over $3 million of buying in a single day, and the data shows Astronics insiders have bought more shares than they've sold over the past 12 months. That's the opposite of what you see at most defense stocks after a big run, and this stock is up nearly 100% in a year.

Here's what those insiders were looking at. In the most recent quarter, sales hit a record $260 million, up nearly 30% year over year. Adjusted operating margin went from about 9% a year ago to a little over 16%. Bookings were a record $306 million. Backlog was a record $780 million, the third straight record quarter, and more than 80% of it converts to revenue within the next 12 months. Quarterly earnings came in at $35 million, up nearly 40% from the quarter before. Return on equity is a little over 50%, against a Defense industry average of about 13%. Management raised full year guidance to more than $1 billion in revenue for the first time in the company's history, and told investors to expect yet another record in Q3.

Looking forward, analysts see earnings growing about 40% a year, more than double the Defense industry average. That's a roughly 55% increase in earnings per share over the next 2 years. Only 1 analyst covers the stock, and it's a good one. Gautam Khanna at TD Cowen, top 11% of all analysts, has a Strong Buy with a target more than 30% above the current price. When a top ranked analyst is the only one paying attention, that's usually a sign of being early.

And the Zen Ratings agree. Astronics earns an overall A, a Strong Buy, and ranks in the top 1% of all stocks. Not top 5%. Top 1%. It's the number 1 ranked stock in the entire Defense industry, out of 85.

Looking at the Component Grades, Sentiment ranks in the top 15%, and Momentum in the top 17%, which tells you the market is starting to notice. Financials rank in the top 7%. A 50% return on equity will do that. And the standout is Growth, which ranks in the top 1% of every stock tracked. There are more than 4,600 stocks in the system, and on growth, only about 25 of them score higher.

One risk. Valuation. The Value grade is a C, and the stock trades at about 37 times trailing earnings. The PEG ratio, which adjusts for growth, is a much more reasonable 1.1, but you're paying for growth to keep showing up, and it's a small cap, so expect bigger swings than the first 3 names.

Here's why that's less worrying than it sounds. More than 80% of a record backlog is scheduled to ship in the next 12 months, management has already said Q3 will be another record, and the people with the best view of the pipeline wrote 7-figure checks in March. Everyone's hunting for the next Palantir in software. Meanwhile, the company that builds the plumbing for every AI enabled aircraft is rated in the top 1% of the market and almost nobody covers it. That's a stock that gets discovered, not hyped.

Conclusion

The AI revolution in defense is real. But the winners won't all be obvious. These 4 companies sit at different layers of the stack: the interceptors, the radars, the secure networks, and the electronics that tie it all together. That gives you diversification, and none of them trade at Palantir's multiple.

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