One sector that has stayed out of the spotlight over the past year has been aerospace and defense. While the pandemic weighed heavily on aerospace, the defense side was somewhat ignored as fund managers started to rotate to cyclical stocks and value plays. The reality is that in an expensive stock market like we find ourselves in now, the sector may be one of the best ideas, not only for the third quarter but for the rest of the year as well.

A new Baird research report takes a close look at the sector, and the analysts are very positive on some of the large-capitalization leaders. They think these companies will not only beat current Wall Street estimates but could very well also provide solid forward guidance for the rest of the year. The report said this:

We expect solid second quarter 2021 reports from defense companies with outlooks meeting/exceeding expectations, whereas aerospace prints should be turning the corner as aftermarket faces easier comps and flight activity continues to improve. We are previewing 19 companies with upcoming reports before mid-August with defense showing most upside to results tied to a spending tailwind.

We screened the 19 companies Baird reported on, looking for stocks that were rated Outperform and had the potential to give positive forward guidance. We found four that look like outstanding ideas before the earnings are released. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

General Dynamics

Like other major defense prime contractors, this submarine and tank builder looks poised to deliver solid numbers and guidance. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.

Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker eight-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.