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Defense Stocks Await Homeland Security Decisions

Posted: Jan 13, 2009 09:56 AM by Gregory S. Davis

Tickers in this Article: UTX, BA, NOC, LMT, PPA, ITA

During his final news conference on January 12, George W. Bush was complimentary and forthcoming. In relation to the defense industry, President Bush touched on the power of the national security briefings he has received six out of seven days every week during his eight years in office to remind him of the weight of his duties as president. In a word, the country still faces threats, and investors eager to discern the direction of the defense industry should consider how the incoming administration interprets these threats.

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New Information
The exact details of the reports are privy only to those with the highest levels of security clearance, but investors should not assume that Obama's intention to scale back troop levels in Iraq will have an immediately negative impact on companies found on the iShares Dow Jones US Aerospace & Defense ETF (PSE:ITA). Northrop Grumman (NYSE:NOC) and Lockheed Martin (NYSE:LMT) could incur a decrease in demand for the defense systems they manufacture as the U.S. pulls out of Iraq. But an increase in systems geared toward homeland security could balance the equation. For example, LMT is positioning itself to capture revenue from homeland security spending with its recent acquisition of the training and simulation provider Universal Systems & Technology, which provides homeland security and technical solutions for multiple arms of the U.S. military, as well as for foreign governments.

Security Through Diversification
Rather than chasing any one stock in the defense industry, investors should consider the PowerShares Aerospace and Defense ETF (PSE:PPA). However, investors may not want to hold both defense ETFs simultaneously because they share the same top three holdings of United Technologies (NYSE:UTX), Boeing (NYSE:BA) and Lockheed Martin. A determining factor for investors would then come down to cost. By the numbers, the ITA ETF has a slightly lower expense ratio of 0.48%. (For more on the importance of low expense ratios, be sure to read Stop Paying High Mutual Fund Fees.)

Tough Decisions
President-elect Obama has made it clear that it is not his intention to prolong the war in Iraq. But investors, who do not have access to intelligence information, have no way of knowing how the government will proceed. And with the magnitude of challenges facing the new administration, only time will tell.

Final Thoughts
It is possible that President Bush, once presented with intelligence information, made military decisions he deemed in the best interest of the country. However, appealing to popular sentiment to end the war in Iraq may have helped Obama's push into office. If the incoming president is successful in bringing an end to the conflict, defense, aviation and aerospace firms focused on growing revenues from the protection of the homeland could benefit.

By Gregory S. Davis

Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.

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