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 - Get Report), Northrop Grumman (NOC - Get Report) and L-3 Communications (LLL - Get Report) 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.