2024 was a good year defense actions. From January 1 to December 30, 2024, the S&P Aerospace & Defense ETF (NYSEMKT:XAR) achieved an impressive 30% increase, beating even the broadest S&P 500 and its impressive 26.5% return. This is the good news.

The bad news is that when stocks go up a lot, they get expensive and may not be such good deals anymore. Three months ago, I concluded that this had become the case for defense actions. I warned investors about it defense actions cost too muchand you won’t believe what happened next.

Three months later, eight of the 10 big defense stocks I reviewed in this column have seen their price-to-sales ratios cut. The two exceptions, the two defense actions that have become more expensive over the past three months, are Kratos Defense and Security (NASDAQ: KTOS)who won a huge contract with the Pentagon earlier this month and, believe it or not, Boeing (NYSE: BA).

Why did defense stock valuations fall?

I seriously doubt it’s just because I pointed out the sky-high valuations in the sector. In part, I suspect, defense stocks fell because the majority stocks fell. Over the past three months, the S&P itself has dropped a fraction of a percent. In part, it probably had something to do with the election, and investors anticipating the entry of the Trump administration could reduce defense spending (for example, by cutting military support to Ukraine).

But in part, I think defense stocks may have fallen precisely because they cost so much. And here’s the thing:

them still it costs too much

Let’s summarize the argument I made in October. To decide whether defense stocks currently cost “too much,” I compared the average valuation of 10 popular defense stocks over the 10-year period from 2004 to 2013, over the 10 years from 2014 to 2023, and also over the 20 years period of the year. To do this, I pulled data on the stock’s average enterprise value/sales ratio from my favorite financial data provider, S&P Global Market Intelligence.

(By the way, the ratio of company value to sales is just a fancy way of calculating price-to-sales ratios and adjusting them for whether a stock has more cash than debt on its balance sheet.) the numbers are seen:

Data source: S&P Global Market Intelligence. *Huntington Ingalls data begins in 2011, the year Northrop Grumman spun off from Huntington Ingalls as a separate company. **Leidos data starts in 2006, the year of its IPO. Data on its average company value-to-sales ratio for 2014 is missing because the company changed its fiscal year in 2015, skewing the data somewhat.

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