6 Stocks That Never Surrender

Welcome back, Fools, to Week 3 of my mano-a-mano melee versus Mr. Market -- and what a difference a week makes!

Last week my portfolio of six defense stocks was handily besting the S&P averages, leading the pack by a good 3.1 percentage points. And now? Based on their prices at market close Thursday, I'm now losing to the market by 7.4 percentage points. Oh, the shame of it all.

So here's the damage report:

Source: Yahoo! Finance. Prices are reflective of July 23rd close. Portfolio is equally weighted.

Good things come in small packages …
As of this writing, only one of my six companies is managing to outpace the S&P's sudden surge -- tiny armored truck manufacturer Force Protection. Stranger still, Force posted its market-trouncing 16% gains before Friday's announcement that it had won another $56 million in contracts to upgrade suspension systems on its Cougar MRAPs for the Marines.

Conclusion: Investors sold off Force too early, and too hard, in response to the company's loss of the M-ATV contract to Oshkosh last month. This dog still has some bite left in him, as last week's contract win demonstrates.

… but so do bad things
And yet, as well as Force performed last week, iRobot did poorly, negating all the gains that Force had contributed. When iRobot reported a year-over-year 9% decline in revenues Wednesday, and a $0.10-per-share loss, investors dove for cover, sending the shares down 17.5% in a matter of 48 hours.

Never mind that iRobot's free cash flow is surging to $25.8 million generated over the last 12 months -- more than five times reported earnings. It's the fear that iRobot will achieve no more than its promised zero-to-four cents in earnings this year that has investors spooked. (But with the stock now trading for little more than 10 times its cash flow, and analysts still looking for 20% long-term growth, my money's still on Roomba sweeping up in the end.)

But bigger isn't necessarily better
Investors across the defense industry "felt iRobot's pain" last week, as this segment of the S&P advanced and presented its earnings. In case you missed it, here are the highlights of defense's anemic earnings compared to last year:

• United Technologies (NYSE:UTX) -- profits down 23%.
• Northrop Grumman -- earnings tumbled 20%.
• L-3 Communications -- down 18%.
• Lockheed Martin -- almost as bad, at negative 17%
• Precision Castparts -- a relative winner, with its 13% slide in earnings.

On the flip side, we did see two actual winners for the week. Boeing (NYSE:BA) grew its earnings 22%, while Defense Portfolio pick Raytheon tacked on a 15% gain. Kudos, guys.

In other news ...
Speaking of Boeing, U.S. Secretary of State Hillary Clinton's visit to India last week bore fruit in the form of an "end-use monitoring" agreement with the subcontinent. The terms of the agreement permit U.S. authorities to monitor how India uses arms sold to it by American contractors, and in the opinion of pundits, improve both Boeing's and Lockheed's chances as they bid on a $10 billion contract to sell India up to 126 advanced fighter jets to replace its aging, Soviet-era fleet.

Ah, the eternal lure of East Asian profits. But this time, there seems to be something to it.

Which is a good thing because ...
What India may giveth, Congress and the President seem intent on taking-eth away. Under threat of presidential veto, Congress caved to the executive branch this week -- twice. First, the Senate voted to eliminate $1.7 billion in funding for Lockheed's advanced fighter jet, the F-22 Raptor (as Secretary of Defense Robert Gates requested back in April). Two days later, the Senate stripped out an additional $439 million in funding to build an "alternate" engine for Lockheed's F-35 Lightning II fighter.

Bad news for General Electric (NYSE:GE), which had hoped to build the backup engine in cooperation with Rolls-Royce. Good news for United Tech, which already builds the F-35 engine, and now looks like the only game in town.

Foolish takeaway
It just goes to show you that even big companies can have bad days. While last week was a rough one for defense investors in general -- and for my Defense Portfolio in particular -- I remain confident that this combination of three value-priced industry stalwarts, juiced with the returns from three more fairly priced, hypergrowth wunderkinds, will trounce the market in the long run.

Tune in again later this week, and we'll see how well my latest round of soothsaying turns out.