Hot Stocks for the Coming Arms Race

Stratfor, a geopolitical think tank, has speculated that Putin wishes to have a confrontation now rather than later, as his country is demographically doomed with a low birth rate and soaring death rate.

Stratfor analysts say that the Russian population is thinning by about 750,000 people per year just as the average Russian grows older and, therefore, less productive -- and they further estimate that by 2050 the country's population will have decreased by a third, or 140 million people. They conclude that as a country, Russia is quite literally dying, and therefore its leaders believe they must stake out their territorial objectives now, before it's too late.

While I can't speculate any further on Putin's motives, I do feel confident that his efforts will spark retaliatory rhetoric and arms spending here in the U.S. The easiest way to participate as an investor is to buy one of the two exchange-traded funds focused on U.S. defense: iShares Dow Jones U.S. Aerospace and Defense(ITA Quote) and PowerShares Aerospace and Defense(PPA Quote). They're up 51% and 44%, respectively, over the past 20 months.

The cheapest and best-managed two individual contractors, in my opinion, are Lockheed Martin(LMT Quote) and General Dynamics(GD Quote). All should be on track for 18% to 22% annual gains over the next three to five years, no matter what happens in the broader financial markets.