Wall Street is underestimating growth prospects for the defense sector, according to Citi. Witness the fact that the SPDR S&P Aerospace and Defense ETF is up about 6.1% year-to-date, lagging the S&P 500’s 9.6% gain. Still, Citi remains confident in “bull case for defense”. Fueled by “budget gimmicks in DC and media headlines,” many investors believe U.S. defense spending has stopped growing, according to analyst Jason Gursky. In fact, both the data and the political rhetoric undermine this argument. In addition, European countries are increasing their defense budgets, he added. Defense companies historically trade at a premium to the rest of the market when defense budgets rise, Gursky said. “In our view, that’s the likely setup through 2030 with stocks poised to see significant appreciation if investors buy into that narrative better. We’ll likely need to see several quarters to get there. [profit] margin expansion across the industry and a more streamlined congressional budget process,” Gursky said. Citigroup argues that defense companies warrant a much higher growth rate than the 0% to 3% assumption investors are currently pricing in. In meanwhile, the current 15% Backlog growth over the past three years suggests broader industry growth of 5%, Gursky added “Furthermore, margins are likely to expand as recent bookings better reflect current costs and the environment supply chain. In our view, investors should look to invest in companies with accelerating revenue growth and margin expansion,” Gursky wrote in a Monday note. Here are some of Citi’s favorite defensive picks, all of which have a buy rating from the bank. Leidos Holdings is up 36% in 2024, pushing the stock up nearly 85% over the past 12 months The $165 mitigation systems suggest shares will gain an additional 12% from Friday’s close Citi is also bullish on Lockheed Martin The prime contractor for the F-35 is a beneficiary of US and growing European defense spending, according to Gursky. Lockheed Martin’s “emphasis on shareholder cash returns [is] is likely to continue,” Gursky said. Some of the catalysts ahead for Lockheed Martin include production and orders for the F-35 and F-16 as well as C-130 transports, Gursky noted. The competitive edge in its space business key questions remain hanging over Lockheed’s stock is down less than 5% year-to-date and over the past 12 months, lagging Citi’s broader $525 price target implies a nearly 12% upside from Friday’s close Shares of LMT Mountain Lockheed Martin is a “well-positioned technology integrator,” wrote Gursky The government services and IT company’s shares are up 9.5% in 2024. Steady revenue and EBITDA growth Next quarters will be bullish for SAIC, SAIC YTD Mountain Science Applications International Corps $155 price target