I’d love to inform you all that world peace has just broken out. Sadly, that’s not the case at all. The war in Iran drags on, with no conclusion in sight. China has sent Donald Trump a stark warning over Taiwan. Casualties mount in Ukraine.

Are recent dips a buying opportunity?

The West needs to rearm, the only argument is where we find the money. Today, all three boast huge order books. Babcock’s is around £10bn, BAE Systems is roughly £84bn, while the figure for Rolls-Royce’s Defence arm is £7.3bn. These numbers give them multi-year earnings visibility, backed by government spending, which is much less cyclical than the consumer version.

On the other hand, orders don’t guarantee profits. They’ve still got to deliver the kit, while keeping costs in check, managing supply chains, and solving the inevitable technical issues that arise.

Babcock’s latest market update (13 May) showed full-year revenue rising 10% to £5.3bn, with underlying operating profit up an impressive 19% to £433m. But there was a larger-than-expected £140m charge on its Type 31 frigate programme.

On 7 May, BAE Systems predicted an increase in underlying operating profits between 9% and 11% in 2026, from 2025’s £30.7bn. But free cash flow is forecast to dip from last year’s £2.2bn to £1.3bn.

Rolls-Royce’s defence division only makes up 25% of the groups overall revenues, so the engineering group can’t be directly compared to Babcock and BAE. All three divisions are going great guns but investors surely feel that Rolls could struggle to maintain its stunning performance.

Are these FTSE 100 stocks still expensive?

I think the main reason for the recent dip is that their shares became too pricey, after such a strong run. Just a few months ago, Babcock and BAE Systems were trading at price-to-earnings ratios of around 30, while the Rolls-Royce P/E was heading towards a dizzying 65. So what do their trailing P/Es look like today?

• Babcock – 19.6
• BAE – 25.3
• Rolls-Royce – 39.4

While they’re notably cheaper than they were, it’s hard to call any of the shares a screaming bargain buy. However, I still think there’s a buying opportunity here for investors who want to increase their long-term exposure to the defence sector. In my view, all three have earned their place in a balanced portfolio of FTSE 100 shares.

Since I already have solid positions in BAE Systems and Rolls-Royce, I won’t buy more. But I’m seriously tempted by Babcock. This is a share I’ll be keeping a close eye on. I think it has the potential to outperform the stock market and deliver even higher returns in the longer return.

Should you invest £5,000 in Rolls-Royce Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rolls-Royce Plc made the list?

Harvey Jones owns shares in BAE Systems plc and Rolls-Royce Holdings plc. 

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With the world facing the biggest energy shock in history, I’d have expected global share prices to have crashed by now. They haven’t. But April was patchy. The FTSE 100 ended the month roughly where it began. Investors still prefer to believe the conflict will be solved somehow, and the Strait of Hormuz reopened. I’m not convinced.

Oil markets can’t make up their minds. On Thursday (30 April) a barrel of Brent crude hit $124, having more than doubled since the Iran conflict began. It’s since slumped to $108. That offers some relief. But it’s still very high. I have a bigger concern. So far, we haven’t suffered meaningful shortages in the West, but they’ve arrived in Asia, and we’re working our stockpiles down at record speed. If shortages become a reality, the shock could land.

Are we looking at a stock market crash?

HFI Research just warned of “panic buying” and hoarding as the world draws down crude supplies. It says that shortages could soon push the price past $150 a barrel. Obviously, we don’t know if that will happen, but I do think the risks are beginning to build. Next week could be very bumpy, as could the rest of May. If UK shares do crash, I have my strategy ready. I’ll go shopping for cut-price companies whose long-term prospects remain intact. I think we could be looking at a big opportunity for investors willing to hold their stock purchases for at least five to 10 years. Many already look tempting.

To my astonishment, FTSE 100 weapons maker Babcock International Group (LSE: BAB) is now one of them. I’ve watched its shares rocket for years, and thought I’d missed my opportunity, as the shares became expensive. But in April, defence stocks took a beating across the board. UK giant BAE Systems, which I hold, plunged 11.35%. Babcock slumped 13.25%.

There are plenty more opportunities like this one

Isn’t there a war on? There is, and sadly it’s showing no sign of ending. Here’s what I think happened. Babcock has flown just a little too high. Despite April’s dip, the stock is still up 270% over five years. As a result, it was expensive, with the price-to-earnings ratio nudging 30. Investors have decided to liberate some profits, and deploy them elsewhere, presumably in better value opportunities.

The slip certainly wasn’t down to anything Babcock did. There was little company-specific news last month, aside from another lucrative UK government contract win. It’s order backlog is now a healthy £10bn, giving investors real earnings visibility.

One downside is that the shares still aren’t cheap. The P/E is still 26.9, well above its 10-year average of 14.5. And if the Iran conflict is somehow solved, its shares could retreat further — but while potentially bad for Babcock, it would be good for the world on both a humanitarian and economic level, so I won’t complain. I think Babcock looks tempting today. I’m now watching it shares like a hawk, and will take advantage of any further weakness. I expect to see many more opportunities like this in the uncertain weeks ahead. I’m in a buying mood.

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That’s a pretty great return, I’m sure you’ll agree. But some FTSE 100 shares have performed far better in that time. Take Babcock International (LSE:BAB), Fresnillo (LSE:FRES), and Lion Finance (LSE:BGEO). A £20k lump sum spread equally across these blue chips five years ago would have turned into £129,207 over the same period.

The question is, can these high performers keep delivering stratospheric returns? Past performance isn’t a guarantee of future returns, but I think they can. Here’s why.

Defence giant

Babcock has delivered an average annual return of 14.8% over five years. As one of Europe’s largest defence companies, its shares have soared since the Ukraine war began in 2022. Earnings have jumped as regional arms spending has accelerated, driving its promotion from the FTSE 250 in March 2025.

But that’s not all. A successful turnaround strategy has also thrust Babcock’s share price through the roof. The results? A sharp reduction in debt, the sale of low-margin businesses, fewer cost overruns, and a reinstated dividend that have all reignited investor appetite.

It’s now in a much better shape to capitalise on the improving defence sector outlook. Remember, though, that supply chain issues could stall its momentum.

Gold star?

Mexican miner Fresnillo is the country’s largest gold miner. It’s also the biggest silver producer by volume on the planet. So it’s delivered spectacular investor profits as demand for these safe-haven assets has exploded.

Over a five-year horizon, the average yearly return comes in at 34.5%. But precious metal prices have buckled more recently as the US dollar has roared back. So could the party be over for Fresnillo shares? Possibly, but I’m not convinced. The buck could keep gaining momentum as interest rates likely rise.

However, there’s a plethora of reasons to expect gold and silver to bounce back and for Fresnillo to rise again. These include:

• Rising geopolitical tensions
• Slowing economic growth
• Returning inflationary pressures
• Rising jewellery demand in emerging markets
• Increasing bullion purchases from central banks

Roaring returns

Like Babcock shares, Lion Finance’s stock traded on the FTSE 250 until very recently (March, in fact). Its share price growth has put those of high-flying UK banks like Lloyds and Barclays firmly in the shade. With dividends added in, the average annual return over five years is an extraordinary 64.4%.

This reflects Lion’s focus on developing markets Georgia and Armenia. Rapid economic growth here has supercharged the bank’s revenues and profits, and delivered those stunning share price gains. The bank’s net income has soared around eight times since the pandemic, reflecting low product penetration and strong economic growth in its territories.

A slowdown following the Iran war could impact near-term performance. But given its huge structural opportunities, I expect more blistering returns from Lion Finance shares over the next five years.

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These companies make weapons. Fighters, destroyers, submarines, munitions, drones and much more besides. As geopolitical tensions rise by the day, their products are in demand. Both have massive order backlogs, more than £80bn in the case of BAE Systems, and around £10bn for Babcock, which is the smaller player. This gives them terrific long-term earnings visibility.

So why did these shares suddenly slump last month?

What’s gone wrong with defence stocks?

Rolls-Royce (LSE: RR) is a more complex case. It has a Defence division, but it’s main line of business is building and maintaining aircraft engines, while it also has big opportunities in power plants, data centres and small modular reactors, or mini-nukes. Yesterday (30 April), Rolls posted a terrific set of Q1 results. Its Civil Aerospace and Power Systems divisions grew strongly, while Defence posted a 20%+ increase in new equipment sales. The shares jumped 7.6% on the day, but Rolls-Royce still ended April down 7.56%.

As a benchmark, the FTSE 100 ended April roughly where it began. We can’t blame the defence stock slump on a wider downturn. So what can we blame?

This might be a case of investors buying the rumour, and selling the fact. Investors are forward looking. Now that war is staring us in the face, they’re looking for the next big opportunity. Also, the stocks have become expensive. The price-to-earnings ratios for BAE Systems and Babcock have nudged 30 in recent months. At one point, Rolls-Royce topped 60. Even after recent turbulence, their P/Es still look somewhat stretched:

• Babcock P/E: 26.9
• BAE Systems P/E: 28.1
• Rolls-Royce P/E: 44.4

These two factors may partly explain what’s going on. Also, many investors will be taking profits, and they will be big profits too. Just look at their five-year performance figures:

• Babcock: 280%
• BAE Systems: 298%
• Rolls-Royce P/E ratio: 958%

Are we looking at a brilliant buying opportunity?

Incredibly, these stellar numbers are after their recent share price slips. Personally, I think it’s pretty clear what we’re looking at here. A good old-fashioned buying opportunity for long-term investors.

Defence stocks were due a bit of a breather. No share or sector rises in a straight line. Investors may also be concerned that European countries won’t step up to the plate and spend more on defence, especially the UK.

I’m still worried about those valuations. There’s scope for further slippage if results disappoint. But investors who feel they don’t have enough exposure to the defence sector, or felt they’d missed out on the action, may now have the moment they were waiting for.

That doesn’t mean defence won’t fall further over the summer. But in my view, the buying opportunity is already upon us and worth considering.

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So far, the blue-chip index has been surprisingly resilient. That’s been a pattern across global stock markets, with investors shrugging off warnings of an oil price spike and fuel shortages. Lately, they’ve preferred to focus on an upbeat US earnings season.

But with the crucial Strait of Hormuz tanker route still under threat, the oil price climbed to $105 yesterday, and the FTSE 100 retreated. Where the war goes next is anybody’s guess. So what should we all do?

Should we just get stuck in and start investing?

At The Motley Fool, we think it’s always a good time to buy shares. With the proviso that investors should take a long-term view. The real benefits of equity investing come over time, as share prices and dividends compound and grow. The earlier investors kickstart that process, the better. Also, anybody who delays stock purchases hoping to find an even better entry point will typically miss it, leaving their money sitting on the sidelines even longer.

I’d argue that we’re already looking at a buying opportunity. On 27 February, the day before the US attacked Iran, the FTSE 100 hit an all-time high of 10,910. It’s down almost 5% since. And some individual FTSE 100 stocks have fallen a lot more than that.

Babcock shares have plunged

Perhaps surprisingly, shares in defence, aerospace, and security stock Babcock International Group (LSE: BAB) are down 22% over the last three months. With the US at war, Europe looking to rearm and the UK government under pressure to spend more on the military, it should be flying.

Babcock combines solid operational performance with a £9.9bn contract backlog, and has even been running a £200m share buyback. But I think the share price had simply flown too far, too fast. Some investors will be taking their ample profits. There’s also CEO transition uncertainty following news that CEO David Lockwood plans to retire this year.

I reckon this stock is worth considering

The share price is still up 42% over 12 months, and a stunning 275% over three years. That rapid growth sent the price-to-earnings ratio towards 30, and many clearly felt the good news was priced in, leaving Babcock vulnerable to a re-rating.

We have that now. Its forward P/E is down to a relatively modest 19.8. So it’s better value than it was. Babcock is no longer a recovery play, and I don’t expect the shares to rise as quickly as before. But those who felt they’d missed out on the chance to grab defence exposure at a fair price, now have a second chance. I think it’s worth considering today.

I can see plenty more blue-chips that have been taken a beating in recent months, and are ripe for a recovery, once sentiment improves. So yes, I think now is a good time to buy FTSE 100 stocks. As ever, with a long-term view. For all we know, the index could rebound next week. That’s investing.

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With Stocks and Shares ISA users having a fresh £20,000 contribution limit to exploit for tax-free gains, here are four of my favourite cheap shares to consider.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Taylor Wimpey

Taylor Wimpey‘s shares have dropped 14% over the last month. As a consequence, its price-to-book (P/B) ratio has toppled to 0.9.

At below 1, the builder trades at a discount to its balance sheet assets. This figure’s also below the 10-year average of 1.4.

The Iran War has created fresh and significant threats for housebuilders. Interest rates are tipped to rise instead of fall, putting buyer affordability under pressure. But is this now baked into the valuations of these stocks? In the case of Taylor Wimpey, I think so.

Over time, I expect the FTSE 250 firm to recover strongly, driving by the rising housing needs of Britain’s soaring population.

ConvaTec

ConvaTec manufactures medical products like stoma bags and wound dressings, demand for which remains largely unaffected during downturns. So why has its share price dropped 9% during the month?

It comes down to market worries over higher transport and manufacturing costs as oil prices increase. Supply chain disruptions and their effect on raw material prices is another emerging problem. But at current prices, I believe the FTSE 100 firm’s worth a close look.

Its price-to-earnings growth (PEG) ratio is 0.3. Again, any reading below 1 is considered bargain-basement territory. I like ConvaTec’s leading positions in fast-growing markets, and think this will drive long-term earnings growth.

Babcock International

Babcock International (LSE:BAB) shares are down 7% over the last month. Not even defence stocks like this have been spared the broader stock market rout.

However, this isn’t because conditions have significantly worsened in the face of the Iran War. Indeed, defence contractors like this stand to gain from increased geopolitical uncertainty. They face increased costs and potential supply issues, but the outlook remains strong for them.

To my mind, Babcock stock has been a victim of its own recent success. The shares surged 95% in value over the past year, leaving the stock vulnerable to profit taking as investor nervousness has crept in.

I see this as a great dip-buying opportunity to think about. With a price-to-earnings (P/E) ratio of 22.2 times, the FTSE 100 firm’s still one of the defence industry’s cheapest stocks. I expect it to rebound in value as global weapons spending steadily climbs.

Safestore

Safestore shares have dropped 13% over a one-month horizon, reflecting worries over consumer spending as inflationary pressures increase. The self-storage company now offers all-round value.

The real estate investment trust (REIT’s) now trading on P/B and PEG ratios of 0.2 and 0.6 respectively. Dividend investors also have a lot to shout about, the dividend yield rising to above 5%.

I’m optimistic factors like steady expansion and limited industry supply will see Safestore shares rebound from current levels.

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Yet the Footsie’s drop also throws up considerable opportunities. Looking at the bigger picture, a huge number of UK blue-chip shares still appear to be on course to deliver exceptional price gains and dividends over the long haul. Snapping them up today could supercharge returns when stock markets eventually recover.

Here are just two FTSE 100 stocks I think could rebound spectacularly from current price levels.

Building back stronger?

Housebuilders like Persimmon (LSE:PSN) could be among the biggest casualties if interest rates rise. With the UK economy locked in low-growth mode, buyer affordability could take a double-whammy.

Building society Nationwide has warned that “UK economic growth is likely to be slower and inflation higher than previously expected“, with the Iran war “clouding the outlook“. No wonder Persimmon’s share price is down 26% over the last month, then.

Yet longer term, market conditions are likely to remain highly favourable for sector earnings. The government estimates at least 300,000 new homes are needed every year to house the booming population. As the UK’s second-largest builder by volume, Persimmon’s well placed to capitalise on this.

In the meantime, Persimmon’s focus on affordable housing could support earnings as buyers trade down in a tough market.

With a price-to-book (P/B) ratio of 0.9, Persimmon shares offer compelling value at today’s prices. That’s below the value watermark of one. It’s also miles below the company’s 10-year average of 1.8.

Too cheap to miss?

Babcock International (LSE:BAB) shares have fallen a sizeable 15% over the past month. Against the backdrop of an escalating war, seeing a defence stock like this reverse might be puzzling to some.

Not to me. Sure, the Middle East conflict threatens to impact supply chains and push up energy costs. But this isn’t the chief reason the company (like industry rival BAE Systems) is reversing. To my mind, it reflects Babcock’s previous huge share price gains and investors now booking profits to raise cash and/or invest in bargains.

In my view, the long-term outlook for the FTSE 100 firm remains as compelling as ever. NATO nations should continue rapidly rearming as the geopolitical landscape becomes bumpier. And especially as the President Trump fumes over other NATO nations not entering the war, raising fresh doubts over US military security in Europe. In this landscape, I expect the defense share to bounce back from its recent fall.

Babcock’s share price drop leaves the firm on a forward price-to-earnings (P/E) ratio of 18.5 times. So, once again, it looks like one of Europe’s best value defence shares — the broader P/E here remains high at 30-31. Like Persimmon, I think it’s a top FTSE 100 dip buy to consider.

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Both look like obvious go-to stocks as Middle East tensions escalate further. Yet anyone expecting them to be flying right now will be in for a surprise. BAE Systems and Babcock have both slipped over the last week, in Babcock’s case by 7.5%. So what’s going on?

Booming FTSE 100 sector

It certainly isn’t because tensions are easing. The FTSE 100 is in correction territory having dropped more than 10% since Iran tensions exploded. It’s plunging today as energy infrastructure comes under threat, raising the risk of an oil price spike or even shortages. More countries risk being drawn into conflict. Yet defence stocks are drifting.

Markets never move in straight lines, and neither do individual shares. Even in bull markets or crashes, there are pauses. That may be part of it. But there’s more going on.

Valuation is an obvious issue. After such powerful runs, both stocks look expensive. BAE Systems’ price-to-earnings ratio is pushing towards 30, well above the FTSE 100 average of around 17. Babcock isn’t far behind.

There may also be a technical factor at play. After such strong gains, some investors may be taking profits and rotating into sectors that have been left behind. With many FTSE 100 stocks now trading at bargain valuations, capital is being redeployed. That may have knocked demand for defence stocks, even while the underlying story remains intact.

Both still have plenty to offer. BAE Systems’ full-year results in February showed underlying operating profit up 12% to £3.32bn in 2025, beating forecasts. Its order backlog hit a record £83.6bn, while net debt fell 22% to £3.84bn.

Babcock’s latest full-year results, published in November, saw underlying operating profit up 19% to £201m, with a contract backlog of £9.9bn.

Investors chasing bargains

Investors may be waiting for the next catalyst before pushing shares higher. Fresh results or major contract wins would help. Government spending is another factor. The UK faces pressure to increase defence budgets, but is short of cash. The same dilemma applies across Europe, with the exception of Germany. Politicians may prioritise competing demands such as protecting households from rising energy costs.

If governments do commit to sustained increases in defence spending, or if tensions escalate further, the sector’s earnings visibility would strengthen. That could draw investors back in.

The defence rally has already priced in a lot of good news, and it’s struggling to push to the next level. At current valuations, it’s easy to see why investors are cautious. I’m wary myself. I hold BAE Systems shares and wouldn’t dream of selling them. But I’m looking elsewhere for my next opportunity. There are so many bargains on the FTSE 100 today, I hardly know where to start…

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Although the aerospace and defence giant continues to post spectacular results, I can’t help but think most of the gains are now priced in. For value investors hunting something with more growth potential, I think one of its rivals looks more promising.

An up-and-coming contender

Babcock International (LSE: BAB) has been one of the standout performers in the FTSE 100 over the past year. Up more than 100%, it’s outpaced even Rolls’ impressive rally, thanks to booming demand in defence and support services. Now, investors are asking if Babcock could achieve growth similar to Rolls since its pandemic lows. 

Admittedly, defence can be a questionable industry as there’s always uncertainty around the ethics of its products. This poses both a risk and moral implication that investors should take into consideration.

Crunching the numbers

In its latest half-year results to September 2025, Babcock posted earnings growth of 49% year-on-year, while revenue climbed a solid 7.4%. That’s no flash in the pan — it’s coming from a £9.9bn order backlog across submarine, aviation and training contracts.

Furthermore, operating margins expanded moderately to 7.9%, indicating improving efficiency at extracting more profit from sales. The full-year outlook remains steady, with management guiding for continued growth.

Valuation-wise, the shares trade at a forward price-to-earnings (P/E) ratio of 24.6, slightly below the average for aerospace and defence peers. That’s reasonable when you consider analysts forecast earnings to grow 7.5% annually for the next few years.

Compared to rivals such as BAE Systems, it’s trading at fair value, not stretched like some high-flyers. Think of it like buying a reliable work van that’s done a few extra miles but comes with a full service history. A solid income earner without the premium price tag.

The pros and cons

Naturally, nobody wants to see global conflicts drag on unnecessarily. Unfortunately, that’s where we are, which means UK defence spending is set to rise. With the UK government committing 2.5% of GDP by 2027, Babcock’s set to continue bringing in revenue for the foreseeable future.

Of course, it isn’t risk-free. Contract delays or cost overruns — common in defence — could squeeze margins. Plus, any easing of geopolitical heat might slow new orders. And a more pronounced market wobble could hit the shares hard too.

The bottom line?

It’s unlikely Babcock (or any share) will be able to replicate Rolls-Royce’s once-in-a-lifetime performance. Growth like this is seldom seen in anything other than highly-speculative tech stocks – and often, it’s followed by a big crash.

However, based on recent performance and supportive macro headwinds, I think Babcock’s one of the more appealing growth stories right now. The 1.6% dividend yield may be a bit underwhelming for income investors but, growth-wise, I see lots of potential.

If you’re after a steady, reliable gainer that has long-term legs, I think it’s worth considering. More interested in dividends? There’s also a host of attractive income stocks on the FTSE 100 right now…

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Lately, nothing has stood in their way. Both FTSE 100 stocks took off after Russia invaded Ukraine in 2022 and have only climbed since. The BAE Systems share price is up 52% over the last 12 months, and 336% over five, with dividends on top. Babcock International Group’s performance is even more eye-watering. Its shares are up 104% over one year and 420% over five.

FTSE 100 offensive sector

Europe is rearming to counter Vladimir Putin, and now we have Iran to worry about. If China moves on Taiwan, we could soon have the hat-trick. That’s not taking into account the unpredictable reactions in the White House. It’s a sad reflection on humanity.

These multiple threats do make UK defence stocks a compelling proposition, but investors must tread carefully. The old investment rules still apply, so be wary of chasing past performance, and overpaying for an asset. 

BAE Systems and Babcock are both expensive by conventional metrics, their price-to-earnings ratios are now pushing 27. That’s comfortably above today’s FTSE 100 average of around 18. 

To give those numbers more context, the average BAE Systems P/E over the last 10 years has been around 18 times earnings. In the last decade, Babcock’s P/E has fallen as low as 3.5. However, this was skewed by a spell of plunging earnings around the pandemic.

Rising profits and order backlogs

BAE Systems’ full-year results in February showed underlying operating profit up 12% to £3.32bn in 2025, beating forecasts. Its order backlog hit a record £83.6bn, while net debt fell 22% to £3.84bn. Babcock’s last full set landed on 21 November. Underlying operating profit was up 19% to £201m, while its contract backlog hit £9.9bn.

Yet lately, investors have begun to appear wary. Shares in both BAE Systems and Babcock are actually lower than they were a week ago, as investors suspected they’d flown as high as they could for now. Some will have taken profits.

Today, conflict with Iran is priced in, so it could take something else to drive them even higher. That could come in the shape of the UK announcing a big defence spending boost, or still more big contract wins. On the other hand, if we get some kind of peace deal, both shares could retreat in short order. At least until the next threat emerges.

It’s interesting to see BAE Systems rising much faster than Babcock today, but not hugely surprising. It’s the bigger, broader defence play, the go-to stock for investors in times of trouble. Also, Babcock has outperformed lately, and investors may feel BAE will flex its superior muscle power.

For investors seeking exposure to the defence sector, both stocks merit consideration with a long-term view. No share climbs forever, but sadly, the winds of war are firmly in BAE Systems’ and Babcock’s favour today.

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