European Defense Stocks: Navigating Near-Term Volatility for Long-Term Gains Ahead of Ukraine Talks

The defense sector is often a barometer of global instability, and right now, Europe’s defense giants are flashing a rare buy signal. While headlines warn of a potential Russian-Ukrainian truce and U.S. defense spending cuts, the dip in stocks like Rheinmetall (ETR:RHM), Leonardo (BIT:LDO), and Saab (STO:SAAB B) is a contrarian’s dream. Let me break down why this volatility is a buying opportunity—and why Europe’s defense spending supercycle isn’t slowing down anytime soon.

The Dip: Why European Defense Stocks Fell—And Why It’s Overdone

Last week, European defense stocks took a breather. Shares of Rheinmetall dropped 6.6%, Leonardo fell 3.3%, and Saab slid 2.6%—all after months of meteoric gains. The trigger? Rumors of a potential Russian-Ukrainian ceasefire and profit-taking by investors spooked by U.S. President Trump’s threats to slash defense aid to Ukraine. But this pullback is overdone. Let’s dissect the numbers:

• Rheinmetall’s order backlog hit €63 billion (up 57% year-on-year), with 70% of sales coming from abroad. Its "nomination" metric (incoming contracts) soared 181% to €11 billion—proof of ironclad demand.
• Leonardo’s fair value is €42.40, per Morningstar, but its stock trades at a discount due to near-term fiscal hurdles in Italy and Spain.
• Saab’s 3-star rating ignores its €371 fair value, which assumes minimal growth in Baltic Sea defense spending.

The sell-off is rooted in short-term noise, not fundamentals. Europe’s defense budgets are on a 10-year trajectory, and the dip is your chance to buy at a discount.

The Contrarian Play: Why Now Is the Time to Buy

This is Jim Cramer territory—a classic "sell in May and go away" panic, but with a twist. Europe isn’t just rearming; it’s redefining its military future. Three reasons to dive in now:

1. Structural Spending Trends:
2. Morningstar projects European defense spending to hit 3.1% of GDP by 2029—up from 2.2% in 2023. Germany’s exemption of defense spending from its debt brake (€500 billion off-budget fund) and the EU’s €840 billion military readiness plan are locked in.

3. Contrast this with the U.S., where Trump’s "America First" agenda has slashed Ukraine aid and pressured allies to shoulder more of the burden. European stocks outperformed U.S. peers by 22% YTD—this gap will widen.

4. Geopolitical Catalysts:

5. Upcoming Ukraine talks could accelerate Europe’s self-reliance. If the U.S. pulls back further, Germany, France, and Poland will double down on domestic production. Rheinmetall’s CEO already warned: "Europe must oppose threats to liberal values with all its strength."

6. Russia’s military losses (875,000 soldiers by mid-2025) mean Europe’s deterrence spending isn’t just defensive—it’s strategic.

7. Valuation Sweet Spots:

8. Rheinmetall’s 25–30% sales growth guidance for 2025 is conservative. Its munitions, land vehicles, and air defense systems (e.g., Skyranger) are selling faster than factories can build them.
9. Leonardo’s joint ventures (e.g., land vehicles with Rheinmetall) and Saab’s Nordic dominance in secure communications give them moats U.S. firms can’t match.

The Ukraine Talks Catalyst: Why This Dip Will Reverse

The market fears a truce could slash defense budgets. Wrong. Even a "partial deal" would force Europe to harden its defenses, not relax them. Here’s why:

• Germany’s 3.2% GDP defense target by 2032 isn’t optional—it’s a political mandate. Chancellor Merz’s reforms ensure debt-free funding for military modernization.
• Leonardo’s €42.40 fair value assumes only modest growth, but its role in Italy’s €44 billion defense plan (2023–2027) is ironclad.
• Saab’s Baltic Sea contracts (e.g., Sweden’s F-39 Gripen upgrades) are non-negotiable amid Russian submarine activity.

The U.S. Contrast: Why Europe Wins

While U.S. defense giants like Lockheed Martin (LMT) and Raytheon (RTX) face headwinds—Europe’s playbook is different:
- No reliance on U.S. aid: Europe’s 3% GDP spending target is self-funded, insulating it from Trump’s whims.
- Domestic supply chains: Rheinmetall’s new plants in Poland and Leonardo’s Italian factories are future-proofed against trade wars.
- Morningstar’s 45% premium on European defense stocks vs. broader markets isn’t a bubble—it’s valuation catching up to reality.

Risks? Yes. But the Upside Outweighs Them

• Near-term dips: Geopolitical noise (e.g., truce talks) or supply-chain bottlenecks (e.g., semiconductors) could cause short-term pain.
• Valuation concerns: European defense stocks trade at 45% premiums to other sectors. But with €1.8 trillion in projected equipment spending by 2030, this premium is well-earned.

Final Call: Buy the Dip—These Stocks Are Going Higher

• Rheinmetall: Aim for the €1,310 fair value—a 30% upside from current levels.
• Leonardo: Target €42.40—20% upside with Italy’s budget reforms.
• Saab: Go for SEK 371—15% upside as Nordic tensions escalate.

The world is on edge. Europe’s defense giants are the only game in town for investors who see beyond the headlines. This is not a sector to dabble in—it’s a must-own for anyone serious about growth in 2025.

Don’t miss this chance to buy Europe’s next "arms race" at a discount. The truce? It’s a buying signal. Act now.

Disclosure: The author does not own these stocks but recommends them as speculative opportunities. Past performance ≠ future results.