I don’t normally pile into fast-growing momentum shares like BAE Systems (LSE: BA) because Murphy’s law says they’ll run out of steam the moment I do. Yet I decided to make the FTSE 100 defence manufacturer a rare exception.
The share price had been flying for years. There seemed little point in waiting for a cut-price buying opportunity. It would probably only climb higher and I’d still have a decision to make.
The case for defence stocks could hardly be stronger in today’s warring world. Since I buy shares with a long-term view, I can give the BAE Systems share price plenty of time to recover from a short-term dip.
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Top FTSE 100 growth stock
Also, I’ve bought a lot of dirt cheap turnaround stocks lately, and thought it would be nice to pick a winner for once. So far, I’m up a modest 5.36%. That’s fine, although it’s not a patch on the 46.97% I’d have got if I’d bought it one year ago. Or its blistering five-year share price growth figure of 196.57%, the second best on the entire FTSE 100 after Frasers Group.
The world is still a turbulent place – possibly even more so – and I’m wondering whether to buy a third tranche of BAE System shares. They’re expensive though, trading at 21.9 times earnings. That’s way above the FTSE 100 average price-to-earnings ratio of 12.7 times (although with good reason).
A recent note from Bank of America Merrill Lynch reflected my concerns. It warned that after a “very strong run driven by positive revisions and a re-rating, it has limited near-term valuation upside”. I’ll hold but I won’t buy more today.
I’m turning my attention to a defence stock that’s been on my radar for some time, FTSE 250-listed QinetiQ Group (LSE: QQ). With a market cap of just £2.57bn, a fraction of BAE’s £42.01bn, it’s theoretically got more scope for share price growth. It also looks better value, trading at a more modest 15.35 times earnings.
FTSE 250 shooting star
Again, I’ve missed some of the action here, with the QinetiQ share price rocketing 27.6% in the last month. Its one-year growth figure is a barely-more-modest 26.39%.
QinetiQ spiked after reporting a 20% jump in full-year underlying operating profit to £215.2m on 23 May, with revenues up 21% to £1.9bn. That’s despite what group CEO Steve Wadey labelled “difficult market conditions” in the US, where recent $590m acquisition Avantus Federal posted modest growth.
Wadey said that overall, QinetiQ is enjoying strong momentum amid increasing spending in key markets. The future looks positive with a record order intake of £1.74bn, lifting its order backlog to £2.9bn.
QinetiQ’s yield is low at 1.83% but dividend growth is progressive, up from 5% to 7%. The group also launched a £100m share buyback running to the end of 2025.
It increased its full-year 2025 guidance to high single-digit organic revenue growth, with operating profit margins stable.
Unfortunately, I think the positives are fully reflected in the share price jump. I’ve learned the hard way to resist buying after a market-moving set of results. The shares tend to settle down as investors bank profits or attention wanders. I’ll buy QineqiQ before topping up BAE, ideally in a summer dip.
