One sector that has been on fire since the election last November has been defense and aerospace sector, and with good reason. The U.S. president has made it clear that improving the nation’s defense capability and upgrading the armed forces is a huge priority. Toss in some billion dollar deals with Arab countries recently, and the future continues to look bright.

One area of concern for some investors is the elevated stock prices. In a new report, while Baird remains positive overall, the firm focuses on companies with the best growth potential going forward. Five companies make the cut, and all are rated Overweight at Baird.

Boeing

This stock has been absolutely on fire and remains a top pick at Baird. Boeing Co. (NYSE: BA) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined.

The different segments in the company are: Commercial Airplanes, Boeing Defense, Space & Security (BDS), and Boeing Capital Corporation, which provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites, and launch vehicles.

The Baird team is bullish on the company’s forward prospects and noted this in the research report:

Boeing continues to see year over year incremental growth on free-cash-flow, with cash being returned to shareholders via buybacks/dividends. Additionally, The company’s new segment of Boeing Global Services (BGS) could favorably impact our FCF estimates by over $1.00 per share by 2021, which further aids the capital deployment thesis.

Boeing shareholders are paid a 2.38% dividend. The Baird price objective for the stock is $274. That compares with the Wall Street consensus target price of $252.20. The stock closed Wednesday at $241.93 a share.

L3 Communications

This one stock that many analysts like into the third-quarter earnings. L3 Communications Holdings Inc. (NYSE: LLL) provides aerospace systems and a range of communication and electronic systems and products used on military and commercial platforms in the United States and internationally.

The company operates in three segments: Electronic Systems, Aerospace Systems and Communication Systems. It offers a range of products and services, including components, products, subsystems and systems, as well as related services to military and commercial customers in business areas, including precision engagement and training, power and propulsion systems, aviation products and security systems, sensor systems, warrior systems, and optics, telescopes and precision optical subsystems.

Its investors are paid a 1.65% dividend. Baird has a $201 price objective, while the consensus price target is $192.93. The shares closed on Wednesday at $182.72.

Raytheon

This company has a diversified mix of business and remains a favorite at Merrill Lynch. Raytheon Co. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services. The company operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems.

Top Wall Street analysts have noted that the strong demand for missiles is a big positive for the company as domestic bookings were up 18%.  The company reported solid second-quarter results that topped Wall Street expectations. Management raised its 2017 EPS, sales and bookings outlook. The company increased its 2017 estimated bookings guidance by $500 million to $26 billion to $27 billion on stronger than expected bookings and order pipeline.

Baird analysts are buyers of Raytheon shares on any weakness and said this in the report:

Significant program wins both domestically and internationally for missile defense and missile systems puts Raytheon in position for favorable organic growth in 2018 and beyond.

Shareholders in Raytheon are paid a 1.76% dividend. The $212 Baird price objective compares with the posted consensus target of $192.61. The shares closed Wednesday at $180.49 apiece.

Spirit AeroSystems Holdings

This top aerospace and defense company offers solid upside potential. Spirit AeroSystems Holdings Inc. (NYSE: SPR) is one of the world’s largest non-OEM (original equipment manufacturer) designers and manufacturers of aerostructures for commercial aircraft. Spirit’s core products include fuselages, pylons, nacelles and wing components. Additionally, Spirit provides aftermarket customer support services, including spare parts, maintenance/repair/overhaul and fleet support services in North America, Europe and Asia. Spirit Europe produces wing components for a host of customers, including Airbus.

The analyst is bullish on new deals and said this in the report:

Spirit AeroSystems signed memorandum of understanding with Boeing is providing great visibility on costs and removes a major overhang on the story, which coupled with higher free-cash-flow generation will provide for re-rating in the stock. FCF target is 7-9% of sales and the buyback remains robust which should continue to support a valuation expansion for the stock.

Shareholders are paid a small 0.55% dividend. Baird has set its price target at $86. The consensus target is much lower at $74.79, and shares closed on Wednesday at $75.32.

Textron

This company was added to the portfolio earlier this year and has acted very well. Textron Inc. (NYSE: TXT) is a multi-industrial conglomerate that has the following operating segments:

1. Textron Aviation manufactures light-to-medium-sized aircraft.
2. Bell comprises Bell Helicopter and Textron Systems.
3. Industrial Products manufactures machinery and equipment for golf/turf, wire and cable installation systems, plastic fuel tanks (Kautex), pumps, gears and gearboxes.
4. Textron Financial is a commercial lending operation that primarily provides equipment financing.

The company has a very solid new product pipeline, and analysts feel the company is demonstrating that new products are the superior solution to combating tough end markets. The new product pipeline includes the Scorpion, Longitude, Denali, Hemisphere, V-280 and V-247.

Baird sees big second-half catalysts for the company and said this in the report:

We continue to see Business jet pricing to sequentially improving in the second half and overall momentum should further recover as the Longitude aircraft receives certification in late fourth quarter of this year. The second half should also begin to show some improvement in operating margins led by Textron Aviation as research and development spending slows for the Scorpion. For 2018, operating margins should see a broader improvement across the segments as mix improves.

Textron investors are paid a small 0.15% dividend. The Baird price target is at $56. The consensus target for the shares is $53.53. The stock closed on Wednesday at $52.33.

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These five top stocks to buy make good sense for long-term growth portfolios. Given the strong moves this year, investors may want to buy partial positions now and see how third quarter numbers come in.

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