Take what you’ve heard about the effects of a Barack Obama U.S. Presidency… and throw it away. The defense contractors are in the best spot that I have seen them in years, yet still-cautious investors are making all the wrong moves. The recent turmoil in the sector has led to some unbelievable valuations in the face of a global arms race, a continued surge in national security spending and regional conflicts that should continue to form opportunities for all of the major defense names.

Looking at a Year-to-Date comparison between the S&P 500 Index and the SPADE Defense Index yields a difference of about 6%, in favor of the S&P. Why? Investors have historically flocked to the defense names because of their steady and weather-resistant revenue streams during hard times. We are actually in a war. Yes, in a war. Also, we get news every day of events like the Mumbai attacks… which should naturally support a defensive thesis, as it did post-9/11. As big-name contractors like General Dynamics (GD: 51.67, +1.49 (+2.97%)) and Raytheon (RTN: 48.80, +1.66 (+3.52%)) continue to produce estimate-topping earnings numbers, while raising guidance (despite big headwinds), the market has largely ignored their success… and I believe it’s time for a pop.

The U.S. Defense Budget - Why it WON’T be Taking a Hit

One of the primary reasons that investors are trading away from the defense sector is the uncertainty in the United States’ defense budget. The 2009 fiscal year budget for the Department of Defense (DoD) has already been signed in by President Bush at $615.5 billion, including stipends for Iraq and Afghanistan. Let’s hear from the two fears that stem from this budget:

1. Liberal Administration Change
One fear is that a democrat in the White House will cause a major shift in our spending to the downside. We should take a minute to look back to the early 90s when we had the Persian Gulf War (now Iraq War) and the election of Bill Clinton (now Barack Obama). The defense budget was, again, in question during this period… yet defense spending actually increased considerably. Not to mention that the defense industry has historically done BETTER under a Democratic administration.

2. Government Spending, Out of Control
Understandably, if we continue to spend ourselves out of a recession we will have to make cuts somewhere. Too many analysts automatically jumped at the chance to point the finger at the Defense Budget.