Al Root

Ukraine pulled off an incredible military operation over the weekend, using drones to hit targets inside of Russia.

It could be an "aha moment" for the defense sector. The stocks, however, aren't moving all that much.

Sunday, Ukraine destroyed Russian bombers and infrastructure using drones smuggled into the country. Reports put the damage at $7 billion. Ukraine President Volodymyr Zelensky called it a " brilliant operation" in a post on X, adding, "The preparation took over a year and a half." In total, 117 drones, controlled remotely, were used.

"Europe, together with America, has better weapons than Russia. We also have stronger tactical solutions. Our operation 'Spiderweb' [on Sunday] proved that," said Zelensky in another post on X. "Russia must feel what its losses mean. That is what will push it toward diplomacy."

"The creativity of the Ukrainian strike should get countries thinking much harder about sheltering combat aircraft and defense against short-range [unmanned aerial systems] -- that will cost money," wrote Capital Alpha Partners analyst Byron Callan on Monday. "We don't know how this could shape, [but are] thinking about (1) investment in air defense; (2) investment in strategic bombers, tankers, and other special mission aircraft; and (3) construction to harden bases."

More spending is generally good for defense stocks, but shares of the large contractors, Lockheed Martin, Northrop Grumman, General Dynamics, and L3Harris Technologies, were down about 1.2% on average in midday trading, while the S&P 500 was flat.

Shares of unmanned-vehicle makers Kratos Defense & Security Solutions and AeroVironment were up 2.1% and 1.3%, respectively.

It makes intuitive sense that makers of unmanned systems are benefiting, but the technology and electronics for defending against drones exist within large contractors. (They also make unmanned vehicles.)

Of course, tactics, along with equipment, deserve credit for the successful raid. "The planning and execution were the really impressive ingredients here," says AeroDynamic Advisory managing director Richard Aboulafia. "Deploying teams and equipment deep into enemy territory depends on the ability to fit in, along with tight communications discipline and planning."

It was a daring mission that the world has taken note of. Investors might not know exactly how things will change. Callan's list of ideas is a good start.

Through midday trading Monday, shares of Lockheed, Northrop, L3Harris, and General Dynamics were down an average of 8% since the Nov. 5 election, trailing the S&P 500 by about 10 percentage points.

The administration changeover, the emergence of low-cost drone technology in the Ukraine-Russia conflict, and its implications for the direction and focus of defense spending have left investors a little nervous.

Write to Al Root at allen.root@dowjones.com

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June 02, 2025 14:34 ET (18:34 GMT)

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