A Defensive Play in Every Way

11/21/2007 12:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Jon Markman’s Strategic Advantage, says defense contractors are good stocks to own in difficult markets, and he recommends one in particular.

Shares of defense contractors tend to find favor during times when the market is having a rough time. During the period of March 2000 to July 2002—most of the span of the last bear market—General Dynamics (NYSE: GD) shares rose 157%, Lockheed Martin (NYSE: LMT) rose 300%, and Northrop Grumman (NYSE: NOC) rose 195%.

GD had actually been quite out of favor going into the last bear market, sinking by 30% in the first three months of 2000 alone. It then became one of the stocks that absolutely "switched on" as soon as the NASDAQ Composite index fell apart. From March 15, 2000, which was the top in the NASDAQ, until the end of that year, GD rose 94%—virtually in a straight line.

We may find ourselves in similar straits before long. If the market does seriously slip over the next few months, we are going to need to be on the hunt for the types of stocks that defy the overall negative trend. One sector may be defense contractors like GD again, as their earnings are generally considered to be safer than most other groups.

On Monday, GD announced that its Bath Iron Works subsidiary won a $142-million contract modification by the US Navy to do more work on the Zumwalt class of destroyers. As you may recall, the Zumwalt boats are the Navy's next-generation surface combat ships. Bath will acquire more materials and do the pre-production planning to lay the groundwork for future Zumwalt ship construction. The original contract was won in August 2006, so expect more contract announcements to follow.

GD also won an $83-million contract this week to develop new display consoles for the Navy. The new displays will be more secure and updated more frequently than prior versions. They will be installed on all Navy surface ships, submarines, and aircraft to unify controls. Most of the work will be done in Fairfax, Va., while other pieces will go to units in California, New York, Pennsylvania, Arizona, and Alabama.

We're up about 13% on GD so far and I still like it a lot on the recent pullback. The only real danger right now is the potential for a slowdown in its Gulfstream private jet business in the event of a global economic slowdown. There's no evidence of that at all yet, but we'll keep monitoring the situation. GD is a great buy for my $115 target. (It closed below $89 Tuesday—Editor.)

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