Take Cover With General Dynamics

Uncertainty over the outcome of the presidential election may be a big factor in how skittish investors are about stocks these days, but it's certainly not the only one. With so much to worry about in the world, it may not be a bad idea to keep a close eye on defense contractors.

Who wins the White House will have an impact on the outlook for defense spending and the stocks of the big guns in the industry. But the heightened awareness of potential terrorist attacks, increasing doubts about the outcome of the war in Iraq, rising oil prices and the concomitant risk to the economic recovery mean that defense contractors may not be a bad place for investors to take cover for the foreseeable future.

A Promising Candidate

Not that money managers haven't already thought of that. In contrast to an S&P 500 that's modestly negative for the year, stocks of defense contractors are solidly in the black year to date. Admittedly, it's tough to find bargains in this space.

At the same time, some names in the group are still far from being overpriced. Take General Dynamics (GD - commentary - Cramer's Take): The company's forward price-to-earnings ratio of 15.1, although right in line with its historical range, is still below the average of more than 16 for some of its peers. And through its Gulfstream business jet division, General Dynamics has exposure to the late-cycle commercial aerospace sector that is just starting to show improvement. This could be a source of positive earnings surprises over the coming year.

Backlog Key to Visibility

Near-term events, the most obvious being the presidential election, could make the group volatile, however. Strong Congressional support for homeland defense and security means outlays for contractors are likely to remain high. But the consensus opinion on Wall Street seems to be that a Kerry administration would whittle away at programs it deems extravagant, most notably missile defense. Even if Bush recaptures the White House, the bulging federal budget deficit may put pressure on Congress to curb its appetite for spending as well.

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Odette Galli is a freelance columnist for RealMoney.com. She has been a writer at SmartMoney Magazine and a senior manager at Ark Asset Management, where she co-managed $3 billion in institutional assets. In addition, Galli was a senior vice president at J & W Seligman. At the time of publication, she had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. She welcomes your feedback and invites you to send your comments to [e-mail].