BAE Systems (LSE: BA.) shares have been taking a hammering since the US midterm elections. The day after America went to the polls, the share price dropped a staggering 6.58%, wiping out billions in market value. A day later, investors were treated to a spot of déjà vu as the share price fell another 1.2%.

All told, the FTSE 100 defence firm lost £5bn in market-cap in a couple of days because of some election that happened across the pond. What’s going on here then? Market overreaction? Chance to buy cheaply?

What’s going on?

What happened with the midterms then? Essentially, the Democrats winning so emphatically means a number of different things. Most importantly for BAE Systems, defence spending could be curtailed.

The US is the company’s biggest customer, accounting for around half of all revenue. And the firm got a boost with recent rhetoric from the President, who had promised to increase military spending to $1.5trn (from $950bn for 2025). The impact of the midterms was felt in defence stocks around the world, notably Lockheed Martin dropping 11%.

It’s anyone’s guess exactly how the new political arrangement in the US will play out. But the early signs from the market are that there will be more difficulty in approving funding in this area.

While the midterms were probably the biggest driver of the fall in share price, there were other contributors too. The rise in interest rates did not help; costlier borrowing is usually bad for the share prices of defence firms. German defence firm Rheinmetall reducing its sales forecast may have played some role as well.

A buy?

So, where are we now? Well, defence is still booming. Spending increases in NATO countries in the wake of the Ukraine war have contributed to the BAE share price rising 221% in the last five years. Of FTSE 100 companies that were listed on the index in 2021, only four others have outperformed it.

It’s true that spending commitments from governments around the world are starting to materialise into contracts. A flood of orders has bumped the order backlog up to £84bn. That’s a stable revenue source for the future too. Governments (which understandably account for the bulk of BAE’s sales) tend to be reliable at keeping to and paying contracts.

How about valuation? The price-to-earnings ratio has dropped to 26. While that might look expensive for British stocks – the FTSE 100 average is around 17 – I see that as reasonable for a growing industry with a huge order backlog.

There’s an ethical dimension to investing in defence stocks which might (understandably) put some people off. But I feel BAE Systems looks like good value after the recent fall. I think it’s worth considering.

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John Fieldsend owns shares in BAE Systems.