Investing in Defense Stocks

Investing in defense stocks has provided solid performance as of late. There are over 250 options for investing in defense stocks in the United States. The ten largest US defense contractors account for 1 percent of the US domestic economy. Investing in defense stocks means buying stock in giants such as Lockheed Martin, Boeing with its Boeing Defense, Space and Security division, Northrop Grumman Corporation and, General Dynamics. It also can mean buying stock in Raytheon Company, the world’s largest producer of guided missiles or L-3 Communications Holdings, Inc. which provides the likes of NASA, intelligence agencies and the military with command, control, communications, intelligence, surveillance and reconnaissance (C3ISR). Well known companies such as Honeywell and Hewlett Packard also do defense contract work although, obviously not exclusively. Stock investing can involve picking new winners and it can involve staying with proven winners. As the world continues to be a dangerous place and the business of war becomes more technical, US defense companies are seen, by many, to be secure if somewhat “defensive,” investments.

The business of making money manufacturing the tools goes back to making armor in the Middle Ages and Krupp making cannons in the 19 th century for the emerging German nation state. Generals have always relied on accurate and timely intelligence to provide advantage in battle. Today’s defense contractors may make very impressive weapons but they make even more complex and impressive systems for intelligence gathering and command and control. As the drones that fly over the border areas of Afghanistan and Pakistan attest to a “geek” with technical ability at a keyboard in California can hunt down and kill a terrorist in a mountain pass in South Asia. Fundamental analysis of the prospects of the many US defense contractors will have as much to do with knowing about their technical know how as with there production capacity.

As many US defense contractors only devote a small part of their business to defense an investor who believes that the nature of the world and the US response will always reward defense stocks will want to stick with companies that are largely if not primarily defense contractors. However, in investing in defense stocks there are different types of stock. Northrop Grumman, for example, is the world’s largest builder of naval vessels whereas Raytheon Company is the world’s largest producer of guided missiles and Boeing not only provides the military with many aerospace products and services but has been the contractor for maintaining the Space Shuttle fleet. A smaller company such as L-3 Communications holdings provides primarily technical expertise and very high tech products involved in intelligence gathering and, more importantly, processing. The big names in defense are the kings of a high cost of entry business and primarily compete among themselves for large government contracts.

One of the investing clichés of twenty years ago when the Berlin Wall fell was that defense stocks were dead. As we see today investing in defense stocks still pays. Although much attention is always paid to the bidding on a very visible new defense system such as a new fighter jet the larger part of the defense business has to do with developing cutting edge technologies, often never made public. For example, long before the ability of spy satellites to visualize incredible detail from space NASA (in 1980) used one of the military’s space telescopes to visualize the first launched Space Shuttle and verify, for 130 miles away, that none of its tiles had fallen off in the launch. The secrecy surrounding the development of Stealth technology is another example of what the defense contractors are doing that makes their stock prices go up.

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