The 10 Worst Aerospace and Defense Stocks of 2011

What a crazy year it's been for investors. The S&P 500 jumped up more than 8% by May, only to turn around and find itself down more than 10% in August, mainly a result of the European debt crisis and Washington's inability to agree on a solution to our debt dilemma. Now, at the end of December, the S&P has fought back and is poised to end the year essentially flat.

While the markets as a whole didn't change much overall for the past 52 weeks, there were certainly companies that had a year to forget in 2011.

Here's a list of the 10 worst performers of 2011 in the aerospace and defense industry.

Source: S&P Capital IQ. Only includes companies listed on U.S. exchanges that contain a market capitalization greater than $500 million. Returns as of Dec. 27.

Defense cuts
Clearly, the big story for aerospace and defense companies is the looming budget cuts that could reduce military spending by nearly $1 trillion over the next 10 years if sequestration cuts are implemented. That is potentially devastating for some of these companies, particularly the smaller defense contractors that are more reliant on their revenue from the Department of Defense.

Luckily for these companies, they do have some major players on their side battling these defense cuts. Defense Secretary Leon Panetta called these cuts a "doomsday scenario," and the DoD is only accounting for a total of $489 billion in cuts over the next decade for its 2013 defense budget (though Washington is the only place that you can use "only" and "489 billion" in the same sentence).

Regardless, it may be unlikely that we'll see a resolution to this until after 2012's presidential elections. Both parties will want to use this as a campaign issue, and that may leave only two months after the election to tackle this issue before $500 billion in automatic cuts are implemented on Jan. 1, 2013.

Small caps struggling
It's not particularly surprising to see many smaller cap defense companies at the top of this list. Four of the six biggest aerospace and defense losers have a market cap of under $1 billion. These companies tend to be more exposed to defense cuts, and a loss of a contract or two can affect them much more than larger, better diversified contractors.

National Presto, which sports a market cap of $670 million, got more than half of its revenue in 2010 from its defense products segment. The stock is down 25% on the year, perhaps due to investors' concerns that the end of the Iraq War and winding down of the war in Afghanistan will affect the company's ammunition sales, which account for such a large percentage of its revenues. Still, the company's dividend yield is 8.5%, and the cheaper stock price may make it attractive for long-term investors.

Opportunity is knocking
So while these companies have been beaten down in 2012, it may be an opportunity to purchase them for cheap. A company like United Technologies (NYSE: UTX), just missing this list after declining 5.9% on the year, is a huge, diversified company that is much more capable of weathering defense cuts. The company gets 20% of its revenues from emerging markets, which have been providing steady growth. The company's Pratt Whitney division is the sole provider of the engines for Lockheed Martin's F-35, the biggest defense contract ever.

Another company that barely missed this list is General Dynamics (NYSE: GD). While the company's stock lost 6.2% of its value on the year, General Dynamics is better diversified than many of its defense contractor peers due to its Gulfstream business jet segment. We'll have to see whether the company's acquisition of Force Protection, completed this month, can contribute to the bottom line.

As defense cuts loom on the horizon, many think 2012 could be a year of consolidation in the aerospace and defense industry. That's something we'll certainly be watching going into 2012.

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