BAE Systems shares are flying, but could they plummet very soon?

BAE Systems (LSE: BA) shares have rocketed over the last month. Of course that’s because of the devastating war in Ukraine. Investors expect global defence budgets to surge on the back of the war, with Germany already pledging to up spending — something it had previously been reluctant to do.

However, with BAE shares up over 25% in just over a month, and most of that in the last few days, there’s a chance that part of this may just be a temporary reaction to the awful events happening in Europe and that further share price upside will be limited. I suspect that even with the dreadful prospect of the war continuing, much of the buying has driven the price up too high too quickly at the moment.

‘Mean reversion’, the theory used in finance that suggests asset price volatility and historical returns eventually will revert to the long-run average (or ‘mean’), seems very likely in this instance. I see investors piling in at present and although I do actually think BAE Systems is both a good company and good long-term investment, now isn’t the time to buy the shares, in my opinion.

BAE Systems shares: a longer-term view

I feel that if the shares do fall soon (and I accept that may not happen) then at a more reasonable valuation, BAE Systems is potentially a good buy-and-hold investment for me. It has ingrained relationships with governments, high barriers to entry, long-term contracts and a healthy 13% return on capital employed (ROCE). These metrics show a steady business that can provide income and growth.

Another steady FTSE 100 growth and income share

Were I looking to invest in a FTSE 100 company, I’d prefer to look at energy giant, SSE (LSE: SSE). A trading announcement is expected soon, which could lift the share price because I see SSE shares as having a number of attractions. One is the ongoing shift to so-called value stocks, which I think should include SSE.

Another is that it has already upgraded its full-year adjusted earnings per share guidance from 83p to 90p, so the business is clearly performing well. Then there’s the 5% or so dividend yield, making SSE potentially a decent income and growth share. Plus there’s its significant involvement in renewable energy projects in the UK and Ireland. And there’s the possibility of international expansion, which the company mentions on its website. 

Only the high levels of debt and the inconsistency of renewable energy would give me pause for thought when it comes to investing in SSE. I’ll research more before deciding whether to buy the shares. 

Its shares are up a much more steady 3% over the last six months, but the shares do have momentum. Taking a longer view, over five years, SSE shares are up 10.6%. This is much better than the FTSE 100’s 1.1% increase over the same period. Remember, dividends would boost the total return to investors. 

BAE Systems shares have risen too much in such a short period of time, on the belief global defence spending will increase long term. While this is likely, I feel the shares have been chased too high and could well plummet to a more ‘normal’ price. As such, SSE is a much better short-term investment for me, and probably also a better long-term one, in my opinion.