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Week 8: Flight to Quality

On Friday, Nov. 9, junior John Wood and freshmen John Leung, Ravi Shah and Bryant Wang presented Lockheed Martin (LMT Quote - Cramer on LMT - Stock Picks) to the group. Lockheed is one of the biggest defense contractors out there, but is it a good investment?

Wood thinks so.

According to Woods, "The choice to pick Lockheed Martin was primarily based on an idea that the economy will not experience great health in the foreseeable future."

Woods explains: "When we were looking for a good stock to pitch, we wanted to find a company that was not pegged to the health of the U.S. economy or to the U.S. dollar, that had financial stability and had high volume . We wanted a stock that investors 'flying to quality' and liquidity might favor."

According to Wood and his crew, defense spending doesn't generally follow the ebb and flow of the U.S. economy but has historically followed a "model" the group believes it can use to predict how much the government will be paying out to contractors like Lockheed in the future. And because Lockheed earns more than 80% of its revenue from the U.S. government, the company was presented as a stable investment.

But why Lockheed and not one of the other defense contractors? Wood, Leung, Shah and Wang see Lockheed as a standout among its peers, which include Boeing (BA Quote - Cramer on BA - Stock Picks), Northrop Grumman (NOC Quote - Cramer on NOC - Stock Picks), Raytheon, and General Dynamics (GD Quote - Cramer on GD - Stock Picks). The company is currently the U.S. government's No. 1 defense contractor, and according to Wood, it is working to keep its place.

Wood explains: "Lockheed is the shining star because its R&D [research and development] spending has outstripped its competitors. ... When Lockheed became the prime contractor for both of the DoD's [Department of Defense] combat aircrafts, it was no fluke or the result of luck, but rather the result of superior technology obtained by greater and sustained R&D spending."

Lockheed was voted into the IAG portfolio with a vote of 31-25.