Military Cuts: Aerospace and Defense Stocks Being Dumped by the Smart Money

In the decade since 9/11, the Pentagon has kept its wallet wide open for defense expenditures, according to Defense Secretary Robert Gates, perpetuating a "culture of endless money, where cost was rarely a consideration." Gates' proposed solution? A round of budget cuts over the next five years to slash military spending by $78 billion, in addition to the $100 billion in internal savings recently announced. These reductions will be the largest the nation has seen in 10 years.

2010's defense budget topped $700 billion, making it the single largest component of the federal government's discretionary budget. So what's been deemed expendable? Not funding for the wars in Iraq and Afghanistan, which, despite a $1 trillion price tag, won't be cut. But pricey military hardware, including a $14 billion amphibious Expeditionary Fighting Vehicle (EFV), is. Also falling into the non-essential category, an army surface-to-air missile program, with Gates skeptical as to their relevance as modern warfare continues to evolve. Gates also aims to slash administrative and personnel costs, seeking more efficient organizational structures.

To get there, the expanding defense budget would have to slow from the 3% mark, a projected $553 billion in 2012. From there, growth would incrementally slow and flatten out in 2015.

Of course, don't expect the cuts to go down without a good Congressional fight -- there's a strong and vocal contingency more than likely to oppose the proposed changes, particularly to weapons programs.

So how will aerospace/defense stocks react to the expected budget cuts? For ideas, we tracked down institutional investors that have been selling defense stocks over the last three months.

Institutional investors typically do extensive research in the stocks they're looking to buy, so it's not a bad idea to pay attention to their trades -- after all, they don't call it the smart money for nothing. But are they being too pessimistic on these names? You be the judge. (Click here to access free, interactive tools to analyze these ideas.)

Institutional data sourced from Reuters. The list has been sorted by the change in institutional ownership over the last three months.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.

Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.