Playing Defense Is the Best Offense

03/31/2010 2:00 pm EST

Focus: STOCKS

Gregg Early

Managing Director, Fresh Eyes Media

Gregg Early, executive editor of Personal Finance, says the best defense contractors offer good, steady growth at an attractive price.

The Department of Defense’s 2010 budget reduces spending on research and development (R&D) across the services, and some big programs have taken a hit, though individual pieces may still receive funding.

Many of the big defense contractors have shipyards and plants across the US; slicing into their contracts hurts American workers. That’s a tough message for politicians to sell in an election year: We’re no longer the world’s policeman, and by the way, you’re now unemployed.

Defense contracts are jobs programs, so the trick is to fund programs that are valuable to the military and have spinoff value for commercial applications. That’s what the smart military brass and civilian leaders do at the Pentagon.

Some defense companies continue to enjoy increasing headroom. Others suffered from delayed or reduced equipment orders in 2009. Either way, if you buy into the best names now, there’s plenty of up side left.

Harris Corp (NYSE: HRS) specializes in satellite, emergency, and secure communications for a variety of sectors. All of its divisions have the opportunity to benefit from an up tick in infrastructure development and systems modernization, as well as expanding demand in developing nations and the need for secure military communications.

The stock trades near its 52-week high (it closed near $47.50 Tuesday—Editor), but the good news has yet to hit its books. Harris Corp is a Buy below $50.

Curtiss-Wright (NYSE: CW) traces its lineage back to the collaboration between the Wright Brothers and Glenn Curtiss, the fathers of modern flight.

Since these trailblazing days, the company has focused on the unsexy work of building highly engineered valves, pumps, and electronic controls for commercial, industrial, and military applications. It’s a major contractor on numerous land, sea, and air systems, as well as power plants and industrial manufacturing facilities.

The stock trades near its 52-week high, but the company’s margins continue to rise. And the flow of new contracts shows no signs of letting up. CW recently inked a $25-million deal with Northrop Grumman (NYSE: NOC) to supply the Advanced Mission Management System (AMMS) for the US Navy’s Broad Area Maritime Surveillance Unmanned Aircraft System (BAMS UAS).

It’s also a major player in the rapidly growing unmanned aerial vehicle (UAV) space. Buy Curtiss-Wright up to $40. (It closed below $35.50 Tuesday—Editor)

Rockwell Collins (NYSE: COL) is an amalgamation of Rockwell, a key player in the development of the US aerospace program, and the Collins Radio Company, a pioneer in shortwave radios. Now, the company designs, produces, and supports communications and aviation electronics for commercial and military customers worldwide.

Like Curtiss-Wright, Rockwell is a go-to contractor in the UAV sector. The company also produces state-of-the-art avionics for new planes and systems upgrades for existing fleets. Rockwell Collins is a Buy below $65. (It closed slightly above $63 Tuesday—Editor.)

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