Load Up on Defense with Lockheed Martin, General Dynamics and Northrop Grumman

Written by Jason Simpkins
Posted February 3, 2015

When it comes to investing, sometimes the best offense is defense.

Literally, defense contractors.

Let's not kid ourselves. President Obama and the Republicans in Congress are unlikely to find much common ground when it comes to the budget. But there is great big plot where all of our interests overlap; and that's national security.

China's defense spending is soaring, and it's policy has gotten more aggressive, bullying its neighbors in nearby waters. Russia is partitioning Ukraine and flying nuclear bombers over the English channel. And the Middle East is as violent and chaotic as it's ever been.

Now, usually, U.S. defense spending is a sacred cow when it comes to budget cuts. After all, we spend more on defense than China, Russia, France, the U.K., Germany, India, and Japan combined.

Defense Spending

But then there was that little matter of sequestration.

You do remember the sequester don't you?

The across-the-board spending cuts that were designed to be so unpalatable as to drive policymakers to the bargaining table cut defense spending by $37 billion in 2013 and $34 billion in 2014.

Well, Obama's recently announced $4 trillion budget undoes that damage. It aims to raise defense spending to $585 billion – about $38 billion above sequestration levels.

The rest of the budget aside, if Democrats and Republicans can't come together on this issue – agreeing to expand the military industrial complex, line the pockets of defense contractors, and build giant new weapons with which to vanquish our enemies – what hope does our democracy have?

This is a slam dunk for America.

It's a slam dunk for Lockheed Martin (NYSE: LMT), General Dynamics (NYSE: GD), Northrop Grumman (NYSE: NOC) too.

Indeed, lifting the spending caps on defense would clear the runway for 44 of Lockheed's F-35 fighter planes and 29 Northrop Grumman drones. It would mean upgrades of General Dynamics' Stryker DVH infantry vehicles, and Lockheed's littoral combat ships.

Of course, defense stocks have done pretty well, even with the budget cuts. LMT is up nearly 30% over the past year, GD is up 40%, and NOC is up 41%.

That's no surpise considering how dangerous our world has gotten over the past few years. And it's a trend that's likely to continue as our allies in Europe and Asia look to upgrade their forces to meet these new threats, as well.

There's always room for war in this world, and there's plenty of room in the budget, too.

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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