The top 4 stocks to buy now and 1 to avoid — according to market experts!

In the hunt for the best stocks to buy now, the analyst team at Jefferies has turned its eyes to the defence sector. But while the London Stock Exchange is home to many thriving aerospace and defence companies like BAE Systems and Avon Protection, the experts at Jefferies have been looking across the Channel for winning opportunities in Europe.

And the four businesses it has recently issued Buy recommendations for are Rheinmetall (ETR:RHM), RENK Group, Dassult Aviation and Leonardo.

But at the same time, Jefferies is warning investors to steer clear of Hensoldt. So should British investors be following Jefferies’ advice?

The appeal of EU defence

With geopolitical tensions on the rise and the US pushing for European NATO members to spend more on defence, this stock market sector looks primed to flourish in the coming years. In fact, German lawmakers have recently voted for a massive surge in infrastructure and defence spending.

Overall, EU defence spending is projected to reach between 3% and 3.5% by 2030 from the current 2% level as of 2024. And while projections should always be taken with a pinch of salt, any upward trend is a growth catalyst for these five businesses.

Rheinmetall is set to benefit from increased spending on land systems and ammunition. RENK is expected to similarly capitalise on higher demand for vehicle transmissions and gear systems for land defence. The European shift away from US platforms for fighter jets creates a welcome tailwind for Dassault’s Rafale fighter jet. And it’s a similar story for Leonardo, which has significant exposure to the Italian defence budget.

The only EU defence stock that didn’t receive much love was Hensoldt. The analysts at Jefferies have expressed concern over its valuation as well as competitive pressures.

Digging deeper

Considering Rheinmetall is Jefferies’ highest conviction idea, let’s take a closer look at it. In its latest quarterly results, the defence firm’s already demonstrating its financial strength. Revenue and profits grew 46% and 49% respectively, during the first three months of 2025. That vastly outpaced expectations. And when paired with a 181% increase in new customer orders, the stock price has exploded by almost 170% since the start of the year!

Subsequently, Jefferies raised its price target from €1,700 per share to €1,880. If that proves accurate, then another roughly 20% gain could be on the horizon.

Despite this explosive display, there are several risks investors must consider. For starters, this surge in orders is being ultimately driven by the conflict in Ukraine. But if the US is successful in brokering peace negotiations between Ukraine and Russia, attitudes towards defence spending in Europe could change.

Considering the surge in valuation has sent its forward price-to-earnings ratio to a whopping 54.6, any slowdown in expected growth could spark significant volatility in the share price. Even more so, considering over the last five years, Rheinmetall shares have traded closer to 20 times forward earnings.

The bottom line

Jefferies has a good track record of picking winning investments. However, it has also made plenty of mistakes. So blindly following the stock picks of any professional or team isn’t a prudent approach to investing. The four defence stocks highlighted look promising, but investors still need to dig deeper into research to discover the risks as well as potential rewards.

The post The top 4 stocks to buy now and 1 to avoid — according to market experts! appeared first on The Motley Fool UK.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Rheinmetall Ag right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool 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 Rheinmetall Ag made the list?

See the 6 stocks

More reading

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended BAE Systems and Rheinmetall Ag. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.