Stay Defensive with Defensive Stocks

11/23/2015 9:00 am EST


Jimmy Mengel

Editor, Outsider Club

I think we can all agree that the United States will continue to sink gratuitous amounts of money into the defense sector, suggests Jimmy Mengel, editor of the Outsider Club.

Among individual stocks, Northrop Grumman (NOC) and General Dynamics (GD) just have launched impressive new programs and have recorded impressive earnings for the last quarter.

Northrop Grumman just won a multi-billion-dollar contract to build the Air Force's Long-Range Strike Bomber. It beat out Lockheed Martin (LMT) and Boeing (BA) for the potential $80 billion deal.

The new B-3 bomber will replace the iconic B-52s. This is the single biggest Pentagon contract in over a decade. The deal could pile another $1 billion per year on NOC's annual revenue.

Since 9/11, it's up 397%, not including the 1.95% dividend that has averaged around 15% increase a year. If you want a defense stock, you can't do much better.

Meanwhile, General Dynamics is also a major player in the defense space: you can chalk up its impressive third-quarter earnings to international defense orders and increasing sales from its submarine-building unit.

General Dynamics has also seen a lot of demand for its Gulfstream aircraft. This jet is the preferred method of transport for the rich, Tom Cruise, Steve Jobs, Warren Buffett, Mark Cuban, and Tiger Woods have all owned one or two.

Since 9/11, the stock has gained 280%. With continued growth and a 1.9% dividend, you have a no-brainer over the long haul.

But there is one easy way to play every major defense stock at the same time: the iShares US Aerospace & Defense ETF (ITA).

This is the largest ETF in the sector, with $526.19 million in assets. It has an expense ratio of 0.43% and yields a 1.06% dividend.

This fund tracks the Dow Jones US Select Aerospace & Defense Index, which is made up of US companies in the aerospace and defense sector, including the two we just went over.

In addition to the stocks already cited, the fund's top holdings are United Technologies (UTX), Raytheon (RTN), Precision Castparts (PCP), L-3 Communications (LLL), Textron (TXT), and Rockwell Collins (COL).

Unless you've been living under a rock, you are all too aware that global instability and war haven't gone anywhere.

Government contracts shift and companies are constantly trying to outdo one another. So, if you want to avoid getting in the middle of a defense stock arms race, this ETF is an easy way to get exposure to this defensive sector.

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