2024 was a good year for defense stocks. From Jan. 1 through Dec. 30, 2024, the S&P Aerospace & Defense ETF (NYSEMKT: XAR) scored an impressive 30% gain, outperforming even the broader S&P 500 and its impressive 26.5% performance. That’s the good news.

The bad news is that when stocks go up a lot, they get more expensive, and might not be such good bargains anymore. Three months ago, I concluded that this had become the case with defense stocks. I warned investors that defense stocks cost too much, and you won’t believe what happened next.

Three months later, eight of the 10 big defense stocks I reviewed in that column have seen their price-to-sales ratios slashed. The two exceptions — the two defense stocks that got more expensive over the last three months — are Kratos Defense and Security (NASDAQ: KTOS), which won a big Pentagon contract early this month, and, believe it or not, Boeing (NYSE: BA).

Why did defense stock valuations slide?

I seriously doubt it was just because I pointed out the sky-high valuations in the sector. Partly, I suspect, defense stocks fell because most stocks fell. Over the last three months, the S&P itself is down a fraction of a percent. Partly, it probably had something to do with the election, and investors anticipating the incoming Trump administration might cut defense spending (for example, by cutting military support for Ukraine).

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

They still cost too much.

Let’s recap the argument I made back 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 running from 2004 to 2013, over the 10 years from 2014 to 2023, and also over the entire 20-year period. To do this, I mined data on the stocks’ average enterprise-value-to-sales ratio from my favorite financial data provider, S&P Global Market Intelligence.

(The enterprise-value-to-sales ratio, by the way, 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.) Here’s how those numbers look:

Data source: S&P Global Market Intelligence. *Huntington Ingalls data begins in 2011, the year when Northrop Grumman spun off Huntington Ingalls as a separate company. **Leidos data begins in 2006, the year of its IPO. Data on its average enterprise 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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