General Dynamics ( GD) could offer some defense for your portfolio in a volatile trading environment.

The stock gained nearly three points Wednesday, closing at $88.93. But don't buy shares just yet: General Dynamics is down fractionally on the year, while its peers like Northrop Grumman ( NOC), Raytheon ( RTN) and Lockheed Martin ( LMT) are all in positive territory for 2008.

General Dynamics has also lagged its peers over the past year, gaining 15.1% with dividends, compared with an average gain of 19.5% for the other three top defense contractors.

These stocks tend to trade in lockstep, so I would not be surprised to see General Dynamics close this gap in the near term. Given this dynamic, should you buy shares now?

While the stock, at current levels, also hasn't kept pace with its peers, General Dynamics is trading still within 6% of its all-time highs. Another factor to consider is the race for the White House next year. So far, the race is wide open, and most of the major candidates have vowed to dramatically reduce the U.S. military's exposure in Iraq.

But even if the next president does move troops out of the Middle East, I believe that defense and military spending will remain strong in the foreseeable future, given the continued high level of caution about global terror risks.

General Dynamics generates about two-thirds of its total revenue from the U.S. government. Top products include the Abrams tank, assault vehicles and nuclear submarines. The company's largest division is information systems, which accounts for 35% of total revenue. General Dynamics also makes the Gulfstream business jet.

GD is expected to post fourth-quarter results Jan. 23. The consensus analyst estimate is for it to earn $1.41 a share, up from $1.13 a year ago, on $7.56 billion in revenue. General Dynamics has averaged 19.4% earnings growth over the past three years, and is expected to grow profits another 12.6% in 2008 to $5.73.

General Dynamics' management is using these earnings to buy back the company's stock. Last month, General Dynamics announced a new 10 million-share repurchase program, equal to about 2.5% of the total shares outstanding.

The company ended the third quarter with $2 billion of cash and equivalents on the balance sheet, and is the only major defense contractor whose debt garners an A rating. General Dynamics also pays a 29-cent quarterly dividend (1.3% yield).

In an uncertain market environment, I believe that General Dynamics is a solid defensive investment. The company has solid finances, and its growth is not very dependent on the strength of the overall economy.

With that in mind, I believe that shares of General Dynamics can move into the triple digits, even if the major market averages remain in negative territory for 2008.
David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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