Should I buy BAE Systems shares or this red-hot rival that’s up 27% in a month?

Harvey Jones would like to add to his BAE Systems shares but thinks he may get better value from a FTSE 250 defence stock that’s rocketing right now.

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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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Harvey Jones has positions in BAE Systems. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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