Defense Stocks Are Thriving but Must Diversify

Major American defense contractors like Lockheed Martin (NYSE: LMT  ) and Northrop Grumman (NYSE: NOC  ) have reported rising earnings in the face of falling revenues, but that can't last forever. Earnings have stayed high thanks to austerity at defense companies, with major contractors furloughing or laying off employees and controlling expenditures to match expected defense budgets.

For defense contractors, the U.S. government is either the only client or the only client that matters. With the America winding down two wars and facing severe budgetary pressure, defense spending is projected to fall steadily with budget cuts over the next few years and then only grow slowly, likely slower than inflation. 

With the major revenue source for military contractors facing a permanent spending cut, the defense stocks that will make the best investments will be those best able to pivot toward civilian and commercial markets. Fool.com contributor Daniel Ferry breaks down the threats to defense contractors, as well as highlights the big opportunities they could capitalize on, in this video.

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