What Do Dennis Rodman, North Korean Nukes, and Sequestration Have in Common?

Great news, America! Dennis Rodman met North Korea's Communist dictator, Kim Jong-un and said, "He's a really good guy." Well, that's a relief. Now we can all forget about the rampant human-rights violations, the mass famine, and the fact that North Korea's supreme military body just announced that it wants to launch a pre-emptive nuclear strike against the U.S. and turn D.C. into "a sea of fire."

You read that right. Instead of backing down because of new sanctions, North Korea has retaliated by issuing more threats against the U.S. and South Korea. While this news may appear to be coming at exactly the wrong time, specifically because of sequestration and defense cuts, there are a few things you should know.

Northrop Grumman Media Resources Photo Gallery-RQ-4 Block 10 Global Hawk flying over mountains. 

First, North Korea has successfully tested intercontinental ballistic missiles, has carried out nuclear tests, and has moved mobile missile launchers into strategic positions. The nation has done all of this in spite of condemnation from the UN, the U.S., and even ally China. North Korea isn't playing around. It wants the U.S. dead and gone, and it has since 1950.

Second, if push comes to shove, America could squash North Korea like a bug. America spends a lot of money on defense. We have a state-of-the-art Missile Defense Agency, or MDA, which includes the following names:

  • Northrop Grumman (NYSE: NOC  ) , the prime contractor on the MDA's Joint National Integration Center, a simulating and war gaming center that provides answers for America's missile defense capabilities.
  • Boeing's (NYSE: BA  ) Ground-based Interceptors -- our first line of defense against missiles.
  • Raytheon's (NYSE: RTN  ) SM-3, a defense weapon used to destroy incoming ballistic missiles.
  • Lockheed Martin's (NYSE: LMT  ) Aegis Missile Defense System, the primary sea-based component of the missile defense system.

Because of sequestration, defense is facing significant cuts. But here are some important points to consider.

On March 1, President Obama signed across-the-board cuts into law. Somewhat shockingly, the markets, and the aforementioned defense giants in particular, responded with a yawn.

I think there are three main reasons for that type of reaction:

  • America is getting used to Washington's shenanigans.
  • The cuts haven't been felt yet.
  • People still expect a resolution.

But here's the thing: It's almost guaranteed that a resolution will include cuts. America can't keep spending as if the bill will never come due. It's irresponsible, and it will end up hurting us more than Kim Jong-un's tantrums.

Most lawmakers know that, so if a budget resolution is ever reached, the Department of Defense will probably still face painful cuts. Nevertheless, the escalating threats coming from North Korea bring into sharp focus why a strong missile defense network is imperative, and why the MDA and its key players aren't going anywhere. Conversely, budget constraints also point to the need for smarter, modern, and more affordable defense systems. Enter the unmanned aerial vehicles, or UAVs -- otherwise known as drones.

Over the past few years, drones have become the fastest-growing segment in the Air Force. Although they are by no means inexpensive, the likes of the MQ-1 Predator and MQ-9 Reaper built by General Atomics are still cheaper than any of the manned fighters they compare with. More importantly, UAVs are part of the future of modern warfare.

Take, for example, President Obama's offer to sell South Korea four of Northrop's highly praised Global Hawks, specifically so South Korea can spy on -- er, more closely "monitor" -- North Korea's activity. Also consider that in 2012, the United States' use of drone strikes rose 72%. The reason is clear: UAVs don't risk pilot lives, they're not subject to human fatigue, they cut down on the need for boots on the ground, they allow for precision targeting, and they don't require the traditional support for combat missions. And besides the Global Hawk -- which costs more than Lockheed's F-35 -- they're cheaper overall.

Two more companies that could benefit from this push are Textron (NYSE: TXT  ) and AeroVironment (NASDAQ: AVAV  ) . Although Textron isn't exactly a small defense company, it's nowhere near the size of the giants. Still, with its $8.5 billion market cap, it's highly unlikely that sequestration can take it down. And with a $2.9 billion backlog in its drone and weapons systems alone, it looks pretty stable. 

AeroVironment, on the other hand, is indeed smaller, and budget cuts will have a more pronounced impact on its revenue. Tighter defense spending, coupled with a reported 34% decrease in its drone segment in its latest quarterly report, has already hammered the stock. However, if shares continue to drop, I'd consider adding some to my portfolio. The company has a good product, and it could definitely turn around, but it's still a little over what I'd like to pay. 

Sequester or no, defense spending is tightening. However, there are some elements that the U.S. can't afford to cut. Missile defense is a prime example, especially with Kim Jong-un doing his little nuclear war dance. The other thing to consider is this: UAVs are the wave of the future, and I can see the U.S. and others relying on them more heavily on them down the road. Consequently, the companies with a strong position in missiles and UAVs are great for long-term investments.

With great opportunity comes great responsibility. For Boeing, which operates as a major player in a multitrillion-dollar market, the opportunity is absolutely massive. However, the company's execution problems and emerging competitors have investors wondering whether Boeing will live up to its shareholder responsibilities. In this premium research report, two of the Fool's best industrial minds have collaborated to provide investors with the key must-know issues around Boeing. They'll be updating the report as key news hits, so make sure to claim a copy today by clicking here now.


Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2013, at 10:20 AM, jonnywadsome wrote:

    really we should not start making profit from war but if Iraq stepped up and at least covered the coast of their emancipation it would make it more feasible to go in and help out another country IF they have the ability to cover any of these expenses and Iraq DOES have PLENTY of ability to cover some of our expense, enough so that IF we need to go in and get rid of this punk ass regime, I don't think it is just pigmy boy but the war hogs that are running the military and the country that are the real problem here. Their leader looks as though he enjoys WAY too much of the western way to act as he does! He alone, give him a bucket of KFC and an Xbox and the whole peninsula would reunite. It IS TIME to TAKE OUT His military though. Threats usually always come true and their threat of nuking anyone IS going to come back to haunt them. When NO ONE will stand behind them it is time to spank them

  • Report this Comment On March 09, 2013, at 3:36 PM, PandoFool wrote:

    I really think that this article makes the mistake of neglecting whether the threat of nuclear by NK is just one part of a broad posturing for internal effect as much as for foreign effect. "Hunh?", you say.. Stay with me.

    North Korea shall never nuke anybody because that will be the end of them. They have made some nasty attacks on South Korea over the years but their approach to foreign policy is to work inline with their bad-boy image. It is not all image but they use real world incidents to remind how prickly they are. Bombing of airliners, shootdown of US planes, sinking of ROK ships etc, are not harmless computer graphics. Setting off a nuclear device speaks of a seriousness to weapon development, as much as to demonstrate authority internally. Strangely, their nukes are for show.

    So they also have internal propaganda needs to support the regime. As the internal environment of NK experiences some perestroika (cell phones, tourism, Rodman?????) their leadership sees a need to maintain a brutal pressure on the civilians. A revolution too would lead to the end and this is of as much importance as any threat from outside.

    Reporting in the media lets that crazy cold water boat launch go without insightful comment. It was meant to show how they have a long term plan to consolidate and demonstrate the new leader's authority. We in the West have already accepted him as a fact, but inside NK the beatings must continue as a matter of routine. Situation normal, foks.

    What this has to do with investing? The change of the NK regime will be messy whatever and whenever it happens. A well-planned diplomatic solution is something which is the stuff of dreams. Forget it. For example, China's preference to keep a buffer zone is a major strategic consideration irrespective of how attractive it is to weapons manufacturers to have a can of whoopass opened on NK. This article scarcely mentions China...

    The conclusion is whether North Korea's leaders feel more pressure to maintain its intertwined, nasty games, than the world does to get rid of them out of principle. The word 'nuclear' simply touches a nerve, unfortunately ratcheting up false perceptions about an NK desire to strike. We need a better principled reason to attack than to use up armaments. We have such reasons in the reunification of the peninsula, the simplification of the political web in NE Asia. Economic progress for Korea could expand markedly with the greater access to real estate.

  • Report this Comment On March 09, 2013, at 10:12 PM, pierre2013 wrote:

    Dennis Rodman is a sport guy, not a politician therefore; no one can misjudge him for what he believe the North Korea's leader who is a basket fan. The conversation between Rodman and the leader was simple a normal conversation same as Lebron James could give his view of Vladimi Putin. Rodman wasn't in a diplomatic mission and will never be on one. The guy is just a black Basket ball super star and I believe if it was a white guy, the media will never used his ideology to what we see today.

  • Report this Comment On March 09, 2013, at 10:28 PM, pierre2013 wrote:

    North Korea Leader has the right to protect the interest of his people same Obama is protected the interest of United States. Be the friend of somebody doesn't mean that you have to let that person to have full control of your house or let that person rape your children. A leader is like a good father always there to protect his nation. If Obama is against the nuclear weapon is because he wants to be sure that United States population is safe and it is the same way for Kim Jun sun to see the good of North Koreans.

  • Report this Comment On March 11, 2013, at 2:04 AM, morgpond wrote:

    It is rather apparent that some here are definately lost. Rodman has no business in North Korea. yes he is just a basketball star. GI Jane was just a movie star also and she wasnt black like one of the previous comenters said. To liken Kim Jun Sun to someone who who has a care for his people is ludicrous. He is nothing more than an attention ho. look at me, look at me. Like a good father? you have got to be kidding. As for the US president I dont like him but I dont see him threatening to nuke North Korea. He has kept this country involved in many problems overseas that we shouldnt be involved in. I am sure there is a bigger picture but I dont see it. A friend of Kim Jun Sun? Rodman is a loser. He just like Kim Jun Sun wants attention as his career sucks anymore. Some will take any attention no matter how bad. I bet when Kim Jun Sun doesnt get the attention he is so desperate for he cries himself to sleep. Rodman is a loser. As I said attention ho's

  • Report this Comment On March 11, 2013, at 11:14 AM, SlowShark wrote:

    The claim that Kim Jun Sun " has the right to take care of his people" is a real fool's comment. No one else in the world, except maybe that crazy in IRAN is threatening to launch a pre-emptive strike.If there ever is any perception that something out of NK is headed this way, he may be safe in a bunker 200 ft. down but everyone else will be toast. He is a "showboat" for the generals who actually are the big threat. A small demonstration strike could be a sample and we could simultaneously tell them "that was just a taste, touch any button and we"ll give you the whole meal". While they may have a huge army I bet half would run for the border if given any chance. I am against un-necessary war ( can anyone say IRAQ ) but as proven 70+ years ago with Hitler, giving in to demands just creates more demands.

Add your comment.

DocumentId: 2302320, ~/Articles/ArticleHandler.aspx, 4/16/2014 9:57:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement