Rheinmetall AG (ETR: RHM) has been one of the standout performers in Europe’s defense sector this year, with its stock price nearly tripling since January.
RHM share price surge reflects investor enthusiasm for defense firms amid heightened geopolitical tensions and increased military spending across the continent.
Despite impressive rally and strong fundamentals, however, “Blue Whale Growth Fund” manager Stephen Yiu is taking a cautious stance.
While he remains bullish on the sector’s long-term prospects, Yiu believes the current valuation levels are too stretched to justify new investments– even in top-tier names like Rheinmetall stock.
Why has Rheinmetall stock soared in 2025?
Rheinmetall’s meteoric year-to-date rally is largely attributed to a wave of defense spending commitments from European governments and NATO allies.
As geopolitical instability persists, countries across the continent have pledged to bolster their military capabilities, triggering a rush of capital into defense manufacturers.
Rheinmetall, known for its armored vehicles and munitions, has been a major beneficiary of this trend.
Investors have responded enthusiastically to the firm’s expanding order book and strategic positioning within Europe’s defense ecosystem.
The broader Stoxx Europe Aerospace and Defense index has soared over 70% year-to-date, but RHM shares’ performance has far outpaced the average, reflecting its perceived leadership in the sector.
Why does Yiu caution against buying RHM shares?
Despite Rheinmetall’s strong fundamentals and sector leadership, Stephen Yiu is wary of initiating or expanding positions at current prices.
In a recent interview with CNBC, the Blue Whale Growth Fund manager agreed he appreciates the quality of European defense firms, but said valuations have reached levels he believes are “quite extreme.”
Yiu emphasized that the sector’s recent gains have already priced in much of the anticipated fiscal stimulus, and that it could take years before government commitments translate into meaningful earnings growth.
“The easy money has already been made,” he argued, cautioning that investors entering now may face limited upside in Rheinmetall shares.
His fund has already taken profits on several defense stocks, including Italian firm Leonardo, and is now adopting a more selective approach.
Recommendation for playing Rheinmetall AG
RHM stock may be unattractive to own at stretched valuation also because it doesn’t pay a healthy dividend at writing.
Yiu’s current strategy, therefore, reflects a balance between conviction and prudence.
While the London based “Blue Whale Growth” fund manager hasn’t exited the European defense sector entirely, he’s scaled back exposure and is avoiding fresh buys in high-flying names like Rheinmetall stock.
According to Stephen Yiu, these names may still continue to do well, but the risk-reward profile has shifted unfavourably.
So, for new investors, he recommends waiting for a more attractive entry point, as valuations normalize and earnings begin to catch up with expectations.
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