These Four Defense Stocks Offer A Good Offense For Your Portfolio

Forbes.com, Summer, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

There has been plenty of market volatility for active traders to enjoy (or cry over when they get the timing wrong), making investing for most of us a bit more uneasy.

Although the S&P 500 is up nearly 17% over the past year, the swings have been significant.

The first quarter of 2012 saw the S&P climb some 13%, only to lose 11% in the second quarter. The old Wall Street axiom “Sell in May and Walk Away” worked in May, but not since then, with markets hitting multi-year highs this week.

In spite of all this volatility, defense related stocks have not only performed very well, but have also demonstrated significantly less volatility than the overall market.

Some of my favorite names in the defense space are: Lockheed Martin (LMT), which boasts solid earnings growth and a 4.4% dividend yield. Raytheon Corp (RTN), which has gained more than 40% in the past 12 months, will provide investors with a 3 ½% dividend yield and a strong history of raising its dividend.

Northrop Grumman (NOC) has also been a stellar performer with a dividend yield above 3%. Northrop’s 5 year expected EPS growth rate is near 11%–the strongest in the category. Lastly, I’m also a fan of General Dynamics (GD). General Dynamics has underperformed the sector as a whole and has been a bit more volatile than the others. However, I believe management has successfully addressed some of the challenges the company has faced over the past couple of years, and could become a star performer.

As we head toward the November elections, I expect the market to continue to rally. Historically, stocks have fared well in the months leading up to the election, but have sold off a bit thereafter.

In the case of defense-related stocks, this may become exaggerated, as defense spending cuts are likely to occur. None-the-less, I think that the aforementioned companies have done a good enough job at expanding their business’ into Internet security and other “modern” areas that should help them continue on their recent path of broader market outperformance and better-than-average risk-adjusted returns, and predictable dividend income.