RTX Is Outperforming Everything. Is It Still the Smartest Buy Right Now?

For investors, the war in Iran is delivering some predictable and some surprising outcomes. In the predictable camp, there's oil and traditional energy stocks. With crude prices surging due to the conflict, energy is the best-performing sector in the S&P 500 this year, and the competition isn't close.

Among the surprises are gold and consumer staples stocks, both of which are betraying their safe-haven reputation as war rages in the Middle East. Add RTX (NYSE: RTX) and other defense stocks to the list of surprises. Over the past month, shares of the missile manufacturer are off about 5.7%.

RTX stock isn't rising because of the war in Iran, but it's still a smart buy. Image source: Getty Images.

Believe it or not, that's less bad than the nearly 8% drop incurred by the Dow Jones U.S. Select Aerospace & Defense Index over the same span. Even with that decline, RTX isn't in a correction, and it's nowhere close to entering a bear market. That's a relief and possibly an indication that opportunity is afoot with this industrial stock.

Moving past disappointment with RTX

Understandably, some investors are scratching their heads over the war-related benefits accruing to oil stocks and the lack of such perks for RTX and its competitors. It's disappointing for market participants who expected armed conflict to boost defense stocks, but not altogether surprising, because financial markets tend to look forward rather than get caught up in the moment.

On that note, RTX and friends could benefit from the familiar theme of increased defense spending, which the war in Iran could catalyze. RTX investors may see that wish granted because the U.S. is deploying a massive amount of firepower in Iran, and much of it is manufactured by this company.

In a report published on April 2, Melius Research estimated that Uncle Sam would need to spend $6 billion to restock the RTX-made ammunition and weapons, including an array of missiles, used in Operation Epic Fury, just to get back to pre-conflict levels. With that report nearly a week old and the war continuing, it's possible that the $6 billion estimate needs to be ratcheted up.

A potential catalyst for this defense stock is that, when the war concludes, the federal government will take the opportunity to replenish military stockpiles to levels not seen before the conflict. That's not a stretch, given that the path of least resistance for defense spending in this country is higher. Specific to RTX, it makes critical missiles and related gear that need to be replaced. The government can't cut corners there.

RTX could blast off again

While investors wait for official announcements of fresh defense largess, they have reason to put the stock on their radars in the near term. RTX reports first-quarter results before the market opens on Tuesday, April 21. Earnings announcements are always important, but the upcoming one from RTX could be a crowd pleaser because the stock is on Morgan Stanley's list of 10 names reporting this month that could deliver surprises.

Market participants who take a long view of RTX may find comfort in knowing that each of the company's three primary segments is considered to have a wide moat, confirming durable competitive advantages. Additionally, large-scale acquisitions are unlikely, indicating RTX is prioritizing firming its balance sheet, which could pave the way for its dividend increase streak to expand beyond the current level of six years.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends RTX. The Motley Fool has a disclosure policy.