3 ASX stocks to watch in defence and cybersecurity

Each Friday, we highlight the key trading themes of the week, along with companies and sectors investors should be keeping their eye on.

 

As part of the weekly recap for Stockhead, our Head of Trading, Trent Primmer, was interviewed to share some trading highlights of the week.

Trading highlights

This week took place in the wake of some extra volatility on local stock markets. Wednesday’s session was particularly shaky as the ASX posted its biggest intraday fall since February 26.

Assessing the recent momentum trends, Trent flagged the “looming spectre of inflation” that’s begun to hang over the market. He also noted that May is historically a month of market repositioning as tax season approaches. Trent said:

"There's a lot of people casing out of the market prior to tax time - in some cases tax-loss selling and in some cases taking profits.”

While that may have exacerbated falls in sectors that have delivered strong post-Covid returns, Trent said the key talking points of recent weeks are still in play with ongoing strength in the commodities complex.

In addition to that, he highlighted two other sectors that may have slid under the radar in recent months as inflation, tech meltdowns and booming prices for iron ore and copper took most of the headlines.

 

Stocks to watch

For the stocks to watch this week, Trent thinks that two big themes we'll see more of in the months ahead are defence and cybersecurity.

He cited broader tailwinds stemming from the federal government’s defence spending plans, where it’s allocated $270bn over the next 10 years. And with regional geo-political tensions on the rise, developments in defence and cybersecurity will increasingly get priority.

 

Orbital Corp (ASX: OEC)

Leading the pack among Trent's defence picks is Perth-based Orbital Corp (ASX: OEC).

Shares in the company, which builds engines used advanced unmanned aerial vehicles (UAVs), rose sharply yesterday after it flagged a site visit by federal defence minister Melissa Price.

Trent said it reflects investor appetite for companies that operate in proximity to what is now a priority area for the allocation of federal government resources.

In comments to Stockhead two weeks ago, Orbital CEO Todd Alder said the company has an advantage for any domestic contracts, given it already has 10 years of product development under its belt and serves a number of global customers.

Whitehawk.width-340

Whitehawk Limited (ASX: WHK)

 

Switching to the cybersecurity sector, Trent said Barclay Pearce client Whitehawk Limited (ASX: WHK) is his pick of the bunch as a company with a diverse client base across corporate and defence. He added:

"(Whitehawk CEO) Terry Roberts is a former Deputy Director of US Naval Intelligence so they’re exposed a bit to that defence thematic through key management.”

WHK's customer base includes US government clients, as well as manufacturing and defence companies.

More broadly, the cybersecurity space posted some strong post-Covid returns as investors assessed the a healthy work pipeline stemming from the enforced move to digital and remote work operations caused by the pandemic. But Trent noted valuations in the space have dipped materially from 2020 highs.

Trent-Primmer

 

“If you look at cyber stocks over the past 30 days, they’ve come off with the broader market but I don’t think the fundamentals have changed for that sector. It’s mainly the fact it’s been included as part of the broader selloff in tech and growth.”

    - Trent Primmer, Head of Trading

 

Electro Optic Systems (ASX: EOS)

Electro Optic Systems (ASX: EOS) is another one that’s come off considerably. So a number of these companies wouldn’t have been on as many radars in recent months with valuations falling, but I think that makes it the ideal time to get some exposure to it.

Trent-Primmer

“Regardless of the tailwind — whether it’s the increase in digital products, off-site data storage or cloud — there’s going to be an uplift in the need for cyber. So as part of that longer term exposure to cybersecurity I’d be happy to buy these stocks at these level, but Whitehawk stands out to me as the company with the biggest market opportunity.”

    - Trent Primmer, Head of Trading

 

 

To read the full Stockhead's article, click here.

 

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