Defense stocks have been on a tear in recent years, but there may be even more upside ahead. On Wednesday, Morgan Stanley analyst Rajeev Lalwani said global threats aren’t going away anytime soon, and defense budgets keep expanding. Headlines about North Korea, Russia and the Middle East will likely continue to fuel demand for defense technology. Defense can also be a solid play during times of economic weakness as well due to its unique government-driven revenue profile.

In addition, U.S. defense spending is only likely to increase if politicians in Washington can get on the same page about key issues.

“We foresee several beneficial opportunities for Defense via successful US policy actions on tax reform, infrastructure spend, and/or further military budget expansion contributing to significant upside in our Bull case of ~50% that could be more appreciated,” Lalwani wrote.

Morgan Stanley’s top two defense picks are Overweight-rated Lockheed Martin Corporation LMT 0.25% and Raytheon Company RTN 1.55%. Lalwani said Lockheed Martin has a well-balanced business with clear long-term visibility and the potential for 15-percent compound annual revenue growth over the next five years. Raytheon has a leading global presence in high-demand markets such as missile defense, and the company has a pristine balance sheet.

Morgan Stanley is less constructive on Equal-Weight-rated Northrop Grumman Corporation NOC 1.04% due to its lackluster free cash flow yields and margin growth.

Finally, the firm is…

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