US Sanctions on Iran Could Brace Defense Stocks: 4 Top Picks

The United States is putting into effect sanctions against Iran beginning Aug 7, targeting the Islamic Republic's currency and key industries. The re-imposition of sanctions is an attempt to curb Iran's hostile affairs that might disrupt the international trade of oil.

The sanctions follow President Donald Trump's actions to pull the United States out of the 2015 nuclear deal in May. The 2015 nuclear deal was between Tehran and six world powers, under which international sanctions on the Islamic Republic had been lifted in exchange for limitations on its nuclear program.

Trump made it clear in his statement on Aug 6 that the Iranian regime must transform its "threatening, destabilizing behavior" and rejoin the world economy, or face economic isolation. The United States warned other nations that either they stop importing Iranian oil by Nov 4 or face the music.

Amid tensions between the two countries, Iran held a military drill in the Strait of Hormuz last week with a fleet of more than 100 boats and hundreds of troops after Iranian officials threatened to close the crucial trade waterway for weeks. It's evident that the drill was a display of Iran's military strength to Washington.

The United States could gear up for a possible military exercise in the Middle East, given the conflict with Iran and its recent military drill. In such a scenario, defense stocks could get a boost.

An Insight Into U.S. Sanctions on Iran

As part of the initial sanctions, trade of Iran's coal, aluminum, steel, graphite, industrial process software and autos will be banned beginning Tuesday. Washington will also implement restrictions on Iranian rial and Iran's accumulation of U.S. dollars from Aug 7. Tehran's licenses to buy European and U.S. aircraft are being withdrawn as well.

The second wave of sanctions that will hit the Islamic Republic will be in place beginning Nov 5. This will target the country's oil industry, shipping, energy and shipbuilding industries, and transactions of foreign financial establishments with the Central Bank of Iran.

The sanctions that come into effect from Nov 5 are more vital, as they target Iran's petroleum industry. The Iranian government's revenues and the country's economic activity depend on oil revenues to a great extent.

Defense Stocks to Gain

Iran's recent military drill in the Strait of Hormuz has sparked concerns over the safety of the vital oil-transport route. The vulnerability of the waterway was in focus after Iran-backed Houthi rebels attacked two Saudi tankers in the Bab al-Mandab Strait on Jul 25. The United States has been considering military action against Iran over the crucial trade waterway, although it will be taken by U.S. allies instead of directly.

Brigadier General Ramezan Sharif, the Islamic Revolutionary Guard Corps ("IRGC") spokesman said on Aug 5 that Iran's military drill last week was conducted with the objective of safeguarding the security of the Strait of Hormuz and was within IRGC's annual calendar exercises program, but Iran's continuous threats for the past few weeks to close the waterway raises concerns among nations that import significant amount of oil from the Gulf and have major trade ties with the Middle East.

In light of the recent developments, a military action against Iran could be in the cards. Therefore, this is a good time to bet on some top defense stocks that might gain in the near term.

Four Defense Stocks to Buy Now

Aerojet Rocketdyne Holdings, Inc.AJRD is headquartered in Sacramento, CA and develops civil, military and commercial systems and components for defense and aerospace markets. Aerojet Rocketdyne carries a Zacks Rank #1 and its shares have gained 10.6% year to date. The company's Zacks Consensus Estimate for earnings has witnessed an upward revision of 30.9% for the current year, over the past one month.

Engility Holdings, Inc.EGL is headquartered in Chantilly, VA and provides government services in engineering, mission support and professional support to customers in the U.S. Department of Defense, allied foreign governments and Federal civilian agencies. This Zacks Rank #2 company's shares have gained 19.3% year to date. The company's Zacks Consensus Estimate for earnings has seen an upward revision of 13.2% for the current year in the last four weeks.

You can see the complete list of today's Zacks #1 Rank stocks here .

Safran SASAFRY is a high-technology corporation that produces aircraft and rocket engines and propulsion systems. The company mainly works in areas of defense, aerospace and aircraft. Safran carries a Zacks Rank #2 and its shares have gained 19.7% year to date. Over the last 30 days, the company's Zacks Consensus Estimate for earnings hasn't changed for the current year.

Textron Inc.TXT is one of the most well-known multi-industry companies, famous for its brands such as Cessna, Bell Helicopter, Beechcraft, Jacobsen and many more. The company is a provider of services and inventive products through its worldwide network of defense, aircraft, financial and industrial businesses.

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Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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