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Defense Stocks Aren't the Sure Bets You Might Expect

There has been a tremendous amount of speculation that a U.S. military response to the attack on the World Trade Center and the Pentagon might benefit defense stocks. But I'm not so certain.

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Defense Stocks Aren't the Sure Bets You Might Expect

Like many others, I've spent the last several days glued to the television, listening to the heartbreaking stories as well as the details of the investigation as they have unfolded. And although it may seem almost trivial to some, I also have actively listened to the press conferences given by President Bush, Secretary of State Colin Powell and Secretary of Defense Donald Rumsfeld for clues about how the investigation and military response might impact certain industries -- specifically, the defense sector.

To that end, President Bush, in his teleconference with New York City mayor Rudy Giuliani and New York governor George Pataki, gave us a hint that any response would be significant. And Secretary Powell was quoted on Thursday as saying that any attack would start with the ruling Taliban party in Afghanistan and other supporters of Osama Bin Laden, and that such an attack would then continue on a "global scale against terrorism in general."

Obviously, these comments suggest that a U.S. military response will be massive and sustained.

But again, this doesn't necessarily translate into huge new orders for the Boeings (BA), Raytheons (RTN) and Northrop Grummans (NOC) of the world. Yes, any attack will likely consume a tremendous amount of bombs, bullets, planes and other conventional weapons. But the current military budget and the spending that results from it is not likely to be altered to any great degree as a result of the World Trade Center tragedy -- unless a major conflict should evolve.

So rather than assume that traditional defense stocks will benefit (although history suggests a small jump is likely), I suggest that some of the smaller, security-oriented companies might be more significantly impacted by increased spending, particularly in the near term.

Who will benefit? Companies such as InVision Technologies (INVN), which makes bomb detection equipment; Armor Holdings (AH), which makes protective armor and vests for police and SWAT teams; CompuDyne (CDCY), which makes attack-resistant windows for government buildings; Vicon Industries (VII), which makes surveillance systems; and Vikonics (VKSI) which makes hardware and software that's used for alarm monitoring as well as intrusion detection systems.

These are the kinds of defense companies more likely to experience a material effect on their bottom lines as a result of this week's crisis.

In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to Glenn Curtis.

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