Is Your Portfolio Bulletproof?

I am a Fool.

I know this not just because the name on our website tells me so -- but because of the audacity of what I intend to accomplish today. I intend to pick a portfolio of stocks, all drawn from a single industry, which will beat the market. And not just beat it, but crush it.

Why is this Foolish? Because everyone knows that you can't beat the market. (Despite the fact that The Motley Fool has been doing just that for seven years and counting.) Everyone knows, too, that your best chance of even tying the market lies in broad diversification -- the best example being buying an index fund.

Balderdash
Fortunately, we make a habit of disproving conventional wisdom here at the Fool. So today, I'm setting out to prove it can be done. Having recently surveyed the defense industry's best large-cap stocks (yes, and its best small-cap stocks, too), I hereby challenge Mr. Market to a duel. My best half-dozen defense ideas versus whatever the S&P 500 can throw at me.

My team
My team consists of a small army of small- and large-cap defense names, each having two things in common: First, each company occupies the sweet spot of one or more crucial niches within the defense industry. Second, each company's stock trades at a discount to its intrinsic value.

Some of 'em you've heard of; others, perhaps not, so after telling you who's going into the portfolio, I'll give you a quick rundown of each -- and why they make the cut:

Company

Starting Price*

Recent Price

Total Return

General Dynamics (NYSE: GD  )

         $51.54

-

-

Raytheon (NYSE: RTN  )

         $42.27

-

-

Lockheed Martin (NYSE: LMT  )

         $78.28

-

-

AeroVironment (Nasdaq: AVAV  )

         $29.96

-

-

iRobot (Nasdaq: IRBT  )

         $11.49

-

-

Force Protection (Nasdaq: FRPT  )

          $4.57

-

-

AVERAGE RETURN

     

S&P 500

         $88.17    

DIFFERENCE

     

Source: Yahoo! Finance. *Tracking begins on July 10, 2009.

Here's why I'm picking them:

General Dynamics
Whether you're U.S. Army, Air Force, Navy, or Marines, General D has got your six. On the ground, this company dominates the battlefield with its M-1 Abrams main battle tank. At sea, "Admiral Dynamics" is rebuilding the Navy from the keel up with its revolutionary Littoral Combat Ship. And although it sold the bulk of its piloted plane operations to Lockheed way back when, the General has recently begun playing Sky Marshal again as it attempts to construct the Air Force of the future -- unmanned aerial drones.

Raytheon
Did someone say drones? Raytheon's got your drones right here, buddy. Building on decades of expertise in the field of rocket science, Raytheon is developing new and more interesting ways to visit exotic locales, meet interesting people, and ... kill them. The company recently licensed the KillerBee UAV from Northrop Grumman, and plans to evolve it into an entire family of flying robots for the military. It's also got a great new toy in the Miniature Air-Launched Decoy -- essentially a drone capable of making people who look at it think it's a full-size aircraft. Cool.

Lockheed Martin
Next, let's bring Lockheed up on stage -- singing "anything you can do, I can do better." If General D and Raytheon have their hearts set on building tiny robot planes, Lockheed has its sights set higher. Much higher. Partnered with Boeing (NYSE: BA  ) , it's the biggest name in international space exploration. Lockheed also manufactures the F-35 Lightning II, which surveys say will become the world's first trillion-dollar warplane -- and maybe more.

AeroVironment
But we were speaking of UAVs. AeroVironment may not be the biggest defense contractor in the world, or build the biggest flying robots -- but it's doing a mighty fine job of building, and selling, small UAVs. So far it's gone head-to-head with the big boys in four separate competitions for Pentagon business -- and won every one of 'em.

iRobot
Closer to ground level we find iRobot -- they of the humble Roomba. But this company does more than just vacuum floors. Like the Three Billy Goats Gruff, the tiny Roomba has a big brother, the Small Unmanned Ground Vehicle, and an even bigger brother, the PackBot. What everybody else is trying to do in the air, iRobot has already accomplished on the ground.

Force Protection
And speaking of the ground, did you know that in some armies, not all the fighting is done by robots? Honest. I kid you not. And when humans fill the role of providing boots on the ground, Force Protection is there with a whole range of armored vehicles to protect them from bad guys' bullets, and improvised explosive devices alike.

What next?
This week, all we've time for are a brief introductions to the companies making up my portfolio. Every week from here on out, though, I'll update you on how this model defense portfolio is performing -- and if not, why not -- and generally prattle on about defense industry goings-on.

Sound like fun? I think it will be. So check back here in one week's time, and we'll see how things are playing out.

Fool contributor Rich Smith likes some of these stocks so much that "he bought the company." Namely: Boeing, AeroVironment, and Force Protection. The Motley Fool has a disclosure policy.

AeroVironment and iRobot are Motley Fool Rule Breakers recommendations. General Dynamics is a Motley Fool Inside Value selection.


Read/Post Comments (5) | Recommend This Article (16)

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 July 10, 2009, at 1:35 PM, Varchild2008 wrote:

    lol. Now this is what I am talking about on my Blog. Defense Stocks! RSI sector wide just about was 39% to FRPT's 27% last night.

    I think investors should consider switching out their industrial stocks and putting their cash into one of these babies! Instead of worrying about when the housing market will come back, start playing the Afghanistan play.

  • Report this Comment On July 10, 2009, at 6:42 PM, rsplattner wrote:

    "each company's stock trades at a discount to its intrinsic value" -- what significance does that fact really have. The GM bankruptcy brutally reminds us that shareholders get zip in BK -- there will be no corporate liquidations in which the excess value goes to stockholders.

    We shareholders don't "own" companies -- management does. They are in control in good times and bad, and they remain in control and reap the benefits of the company's existence -- in good times and bad.

  • Report this Comment On July 11, 2009, at 12:51 AM, robertf36009 wrote:

    South Asia does not provide an opportunity for defense stocks. It is a asymmetrical war requiring more low tech than high. AVAV and IRBT may profit but the trend in defense is down. Team Obama is cutting major programs like FCS and missile defense not to mention the F22. Avoid this play like the plague.

  • Report this Comment On July 12, 2009, at 10:04 PM, Varchild2008 wrote:

    FCS + F22 + missile defense = NOT ARMY plays.

    Therefore, I contest robertf36009 is wrong about the defense sector on the grounds of no mentioning the very fact that the ARMY has had its budget INCREASED by as much as 2% (not counting whether or not there were additional increases off of any signed or yet to be signed military supplemental bills).

    Many defese stocks are seeing huge boosts to their balance sheets coming from the ARMY.

  • Report this Comment On July 12, 2009, at 10:16 PM, Varchild2008 wrote:

    http://www.armytimes.com/news/2009/07/army_bigger_070609w/

    That article above should be read to fully understand the growth momentum possibility behind the Army.

    Plus, also consider that when anything NEW gets cut it places pressure on the Government to have to spend an ever increasing amount of money to support the OLD equipment.

    It works exactly like your CAR purchase behavior.

    If you have a brand new car, you are not likely to buy a brand new car to replace your car. However, if you refuse to buy a new car this year, next year, the year after, and so on for 10+ years....The maintenance, support, and other costs skyrocket as your your car gets older.

    Stuff breaks down... And defense contractors are right there to receive support and maintenance contracts and contract extensions. Not to mention having to produce new equipment/products that help extend the life of the older equipment.

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