Defense and Aerospace Stocks Are Lifting Off

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some aerospace stocks to your portfolio but don't have the time or expertise to hand-pick a few, the PowerShares Aerospace & Defense ETF (NYSEMKT: PPA  ) could save you a lot of trouble. Instead of trying to figure out which aerospace stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on defense and aerospace stocks, sports an expense ratio -- an annual fee -- of 0.66%. The fund is fairly small, too, so if you're thinking of buying, beware of possible large spreads between bid and ask prices. Consider using a limit order if you want to buy in.

This aerospace stocks ETF has trounced the world market over the past year, and also topped it over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why defense and aerospace stocks?
Customers might not be eager to spend hundreds of millions of dollars on new airplanes and other defense and aerospace equipment, but as commercial fleets age, they do inevitably need to be replaced. And until our military shrinks considerably in size, it will continue to stock its hangars and storage areas. Thus, defense and aerospace stocks can count on plenty of future business -- eventually. (Newer airplanes that are more energy-efficient are also a strong draw, given the rising cost of fuel.)

More than a handful of defense and aerospace stocks had strong performances over the past year. Oshkosh (NYSE: OSK  ) surged 53%. The maker of military trucks and other things disappointed investors with its fourth-quarter report, which featured revenue down 16% and management significantly scaling back expectations for 2014 as military spending cuts continue hurting its defense business. On the plus side, though, it did recently win a $105 million contract extension with the Department of Defense. Oshkosh is aiming to boost profit margins via cost-cutting, among other measures. The stock yields 1.2%.

L-3 Communications (NYSE: LLL  ) soared 39% in the past year. It's near a 52-week high, and it yields 2.1%. Its third quarter featured revenue a bit below expectations, but earnings handily beat estimates and were 13% above last year's level. Still, it, too, is smarting from military spending cutbacks. It's more nimble than some rivals, but it's also quite dependent on the U.S. government for much of its revenue. Over the past few years, though, revenue and free cash flow have been dropping, as have operating margins. L-3 Communications' P/E ratio near 12 looks low, but remember that the company isn't growing briskly.

Honeywell (NYSE: HON  ) also popped 39%, is also near a 52-week high, and yields 2%. Honeywell plans to buy back up to $5 billion worth of its shares, which could benefit shareholders as long as the stock isn't overvalued. With a recent P/E ratio near 22, above its five-year average of 19, Honeywell stock doesn't seem a screaming bargain. The company's CEO recently ratcheted down expectations, due to a sluggish global economy.

United Technologies (NYSE: UTX  ) jumped 36%, and yields 2.2%. It looks like more of a bargain than Honeywell, but it isn't generating as much cash as it might, given the many contracts it's raking in. United Technologies had such a strong 2013 (in part benefiting from Boeing's success) that some wonder if it's still attractive. It may not be the most attractive stock around, but shareholders might want to hang on for the dividend and solid balance sheet.

Other companies didn't do quite as well over the last year, but could see their fortunes change in the coming years. FLIR Systems, for example, did gain a hefty 24%, but that still underperformed the S%P 500 in this strong year.

The big picture
If you're interested in adding some defense and aerospace stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in it and profiting from it that much easier.

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