After falling 12% is BAE Systems now a screaming buy for my Stocks and Shares ISA?

This year’s Stocks and Shares ISA deadline is fast approaching and I’m wondering if I’ve met my quota FTSE 100 the defense giant BAE Systems (LSE: BA).

Its shares have retreated in recent months, suggesting this could be a real buying opportunity. But what happened?

One year ago, stocks were rising as military spending rose due to the conflicts in Ukraine and Gaza. BAE Systems’ full-year profit for 2023 hit £2.7bn on record sales of £25.3bn.

This left me with a problem. I really wanted to add stocks to my self-invested pension (SIPP) but I’m afraid the BAE Systems share price will run out of juice by the time I take the plunge.

Can this stock take off?

And that’s exactly what happened. I bought BAE on 7th March for £12.75, and again on 10th May for £13.85. It came down.

At today’s price of £11.71, I am sitting on a paper loss of around 12%. Sod’s rule strikes again, but it also gives me an opportunity to reduce the value of my stake.

BAE Systems isn’t exactly cheap, with a price-to-earnings (P/E) ratio of 18.26. But it’s cheap by its high-flying standards. I bought when it traded about 23 times. That broke a good rule of thumb but I was happy to do so as the board has worked hard to close the rating gap between its US competitors. I just wish other FTSE 100 companies were successful.

So what went wrong? In my opinion, that’s the P/E that went wrong. It said Bank of America Merrill Lynch will downgrade the stock from Buy to Neutral in May, and to Underperform in November. The seller also expressed the fear of reducing the costs of the US government that may be directed by Elon Musk’s Department of Government Operations (DOGE).

President-elect Donald Trump wants NATO members to spend more on defense, which should bode well for BAE Systems. However, Trump also wants the US to spend less. Given the need for the US to show military power as China rearms, I suspect he will take that thinking so far.

Buy and hold long?

BAE Systems still has a large long-term order book, boosted by the Aukus deal between Australia, the UK and the US, to build the next generation of nuclear-powered attack submarines. It also benefited from a global fighter jet program between Italy, Japan and the UK to build a new fighter jet.

Much now depends on Trump’s attitude towards Vladimir Putin’s Russia. Until recently, many expected him to push for a poor peace deal in Ukraine, but there are signs that his thinking may have changed and he may be getting tougher on Putin.

Either way, once the war is over, this could hit defense stocks across the board. With the Middle East uncertain, and fears growing over Chinese intentions toward Taiwan, that may be a temporary setback.

Despite my initial disappointment, I am confident that my shares in BAE Systems will prove an excellent buy in the long run. I will see what Trump does after entering the White House with a view to building my stake in BAE Systems before the April 5th deadline for ISA Shares and Shares.