If I’d invested £500 in BAE Systems shares 2 years ago, here’s how much I’d have now!

BAE system (LSE: BA.) Shares were among the biggest winners over the past 12 months. The multinational arms, security, and aerospace company has repeatedly supported its growth position in a very positive environment for the company’s operations.

So let’s take a look at this weapon manufacturer and see if it’s a good fit for my portfolio.

Outperforming the market

BAE Systems shares are up 77% in two years. That’s phenomenal growth for a £26bn company. So an investment of £500 two years ago would be worth around £890 today.

That’s definitely more of a return than I expected. I could also add a dividend to that which would be worth around £50, given the dividend yield would have been closer to 4% at the time of purchase.

During this time, the FTSE 100 up around 20% – which is impressive, but has risen from a low starting point. So clearly BAE has outperformed the index by a long way.

What is behind the waves?

In an update at the end of 2022, the company said that a weaker pound would provide a tailwind to its reported annual earnings and sales, adding that it expected to grow further in 2023 as “high threat environment“.

Barclays believes that the UK’s largest defense company can report double earnings per share of 12%, compared to 2021, at 53.7p. Analysts at the bank suggested that the order book would grow by 45% to around £31bn.

Meanwhile, pre-tax earnings could be around £2.45bn, up from £2.2bn. Revenue is expected to reach £23bn, up from £19.5bn. These figures, if they come to fruition, demonstrate the material impact of the very pounds and increased defense spending.

A strong order book has been bolstered by commitments on defense spending in the UK and elsewhere around the world following Russia’s invasion of Ukraine. The opposition leader, Keir Starmer, has also committed to reloading the British military if Labor wins the next election.

Should I buy BAE Systems shares?

BAE Systems trades with a price-to-earnings (P/E) of 17 and a forward P/E of 15. That’s a little over the index average, but it generally shows confidence that the company will continue to grow in the next decade. , amid an increasingly threatening geopolitical environment.

If I was going to the fundamentals alone, I would buy this stock. But two things caught my attention. First of all, I don’t tend to buy stocks very quickly – they are up 42% in 12 months. And secondly, the share price is heavily influenced by geopolitical events – such as the US spaceflight purge.

Stock prices can jump or fall, more than other stocks, depending on government comments and narratives. And now, I don’t like it because it means that stocks can be removed from the underlying data.