Getting Armed for a Defense Stock Portfolio
Like football fans in the upper deck, mutual fund managers have been chanting "defense" over and over lately. But those cheers could quickly turn to jeers if the industry doesn't win some big upcoming budget battles in Washington.
Defense stocks have been on a spectacular, albeit stealthy, run since last summer. Flying well below the market's radar, the Philadelphia defense index, which tracks the 17 largest defense and aerospace companies, is up 30% over the past year -- more than double the return of the S&P 500 Index (SPX). In the fund world, the (FDSAX)Fidelity Select Defense & Aerospace fund, one of the few funds devoted to the sector, is up 13% year to date, a full 10 percentage points better than the S&P.
Most recently, defense sector stalwarts Lockheed Martin (LMT), Northrop Grumman (NOC) and L-3 Communications (LLL) blew away Wall Street's second-quarter earnings estimates and raised full-year guidance, citing continued strength in defense spending and growth in homeland security projects.
Mutual fund managers benefiting from the sector's run-up expect the rally to continue through the end of the year. Nevertheless, they are trying to temper investor enthusiasm for a group that has returned to trading on congressional votes instead of responding to terrorist strikes.
Permanently Committed"There will always be a need for defense," says Dan Ahrens, portfolio manager at the (VICEX)Vice fund. "We are permanently committed to it." Ahren's fund, which invests solely in alcohol, gambling, tobacco and defense stocks, is up 6.8% this year. That commitment to the national defense costs taxpayers about $400 billion a year, with the bulk of that going toward maintenance and operations. Roughly $150 billion of that sum is targeted for defense contractors, an amount that will remain virtually unchanged from 2005 to 2006. One might think the flat year-over-year budget for big-ticket weapons would limit the upside for defense stocks after their monumental run. However, a number of analysts say there are a few potential positives that should keep the group marching on, although perhaps at a slower pace.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV