00:00 Jared
I want to show Wi-Fi interaction. We have a year-to-date heat map of defense stocks, and there’s a lot of green in the top left corner of the screen, GE, which is up 87%. Well, RTX is up 60%, and so on, Lockheed Martin is only broken or even there, but that is the exception. Tony, one thing I’ve noticed this year is that in the post-Liberation sell-off, these stocks did very well. Arguably, they performed better than some others. So, here’s something I’ve noticed this year. What factors do we need to consider as we move into next year, 2026?
01:03 Tony
Yeah, great to be with you, Jared. I agree. I mean, a lot of what’s on the heat map is our Gabelli, uh, GCAT ETF, commercial aerospace and defense uh ETF this year. So, we saw a lot of good things. Well, you know, I think things will probably be relatively more similar 26 years from now. I mean, we saw the news over the weekend that Ukraine was trying to hold a referendum on this land, and then yesterday we saw China doing their embargo exercises. Well, you know, I just think there’s still a lot of instability globally and defense budgets are increasing globally. Well, NATO is of course 2%, rising to 3% and 1/2%. The United States has reached trillions of dollars for 26 consecutive years and is likely to continue. So you may see more of the same in 2026 and beyond.
02:18 Jared
With all the talk about artificial intelligence, sometimes that’s all we can talk about, which is naturally where my next question or topic comes from. How big of a factor is this for some of the stocks we discuss here? Some companies have been quick to adopt, while others have been slow to adopt. What role does it play in aerospace and defense?
02:46 Tony
Yeah, you know, I think the reality is that artificial intelligence, um, you know, there’s a lot of uh uh foundation in aerospace and defense. I mean, all the way back to a simple artificial intelligence tool, the self-driving system. This dates back to 1912. You could call it a closed loop uh feedback system. Um, so, you know, artificial intelligence has actually been playing a big role in aerospace for a long time. Now, you’re probably talking about modern artificial intelligence, uh, companies like Palantir and Defense Technologies and Andurils. You know, you’re probably going to see more of the same. Any way you can automate, optimize, um, have autonomous systems, when lower level decisions don’t need to be made, you know, without humans involved, you’re probably going to see more of that. The companies we like are, you know, players in the space.
04:00 Jared
Yes, there are times when you don’t want to be on the phone without mentioning AI, especially when talking to an analyst. I want to talk to you about mergers and acquisitions, mergers and acquisitions. Money is getting cheaper and the Fed is lowering interest rates. What are the prospects for the M&A season in the first quarter and continuing into the end of 2026?
04:31 Tony
Yeah, you know, it’s divisive. Obviously, as you pointed out, the aerospace and defense industry has grown quite a bit in 2025. So you have a high P/E ratio. But on the other end, you still have um you know the laggards who are really good businesses that have, uh, high barriers to entry, exclusive source uh programs. Um, you know, uh they they they they they’re ripe for picking. Companies in our portfolio — In our GCAT portfolio, we believe, there’s a company called Albany International, which has two businesses, one is a strong aerospace and defense business. They also had an industrial business and, you know, the two together didn’t really make sense. We think these may involve some type of financial engineering uh and mergers and acquisitions, um you know, in the next uh you know, uh you know, 12 to 18 to maybe a little further. But there are definitely some companies that are not as involved in the run-up as others, and there may be some mergers and acquisitions this year and next.