We see nations like China and North Korea attempting to expand their horizons to other areas of the globe… signing contracts with the likes of Cuba and Venezuela to control Latin America. Nicaragua started some problems of their own with an election on November 9th that is being disputed as fraudulent. Iran is trying to completely monopolize the oil market by seizing control of the Straight of Hormuz, a channel through which over 20% of the world’s oil is shipped. Afghanistan continues to spiral down the path of no return. India is in shambles after a terrorist attack on Mumbai, it’s business capital. Pirates remain in control of the African coast, killing many trade routes. Iceland’s economic crash caused a potential alliance-shift away from the U.S. toward Russia. And all the while, the United States is attempting to impose sanctions on other nations’ nuclear weapons capabilities.
The point here is that although we are hearing more about the financial crisis than anything else on the front page of the Wall Street Journal, it is in fact this global tension and geopolitical movement that will be bucking the long term trend. At any rate, it’s safe to be in defense names as more conflicts arise.
What To Look For in 2009
1. Defense Technology
I love the long term prospects behind the C3ISR Index (Command, Control, Communications, Intelligence, Surveillance and Reconnaissance), which tracks defense technology. These are the companies providing the essentials that support our troops, increase the safety of our nation’s military forces and reduce conflict. Out of the group, you are best with staying large-cap with Lockheed Martin (LMT: 77.11, +3.58 (+4.87%)) in the event that global hardships continue.
2. Maintenance and Repair
A major trend in the coming years is bound to be the focus on maintenance over replacement. Many companies are less reliant on booking new projects that put a noticeable dent in the United States’ DoD budget; any company with an information technology unit will, by default, have an extraordinary amount of support work to do ’round the clock. Whether it’s General Dynamics and their repairs to the Abrams Tanks, or United Technologies’ (UTX: 48.53, +0.80 (+1.68%)) multiple consumer-based and maintenance-intensive businesses… you’ll be safe sticking with those repair specialists.
The defense sector is locked, loaded and ready to go at these ultra-low levels. With Lockheed Martin, General Dynamics, Northrop Grumman and L3 Communications all trading at multiples under 10 times earnings (and their competitors not much more expensive), we are bound to see some upward capitulation in these companies. When you are staring down a global arms race, rising international tension and dirt-cheap valuations… it’s hard not to start buying these inexpensive companies.
-Jim Regan
Disclosure: The mutual fund that the author is associated with is long GD.
