OK. Ha-ha. It was funny the first few weeks, but this joke's getting pretty tired, pretty quick. In Week 5 of my mano-a-mano melee versus Mr. Market, my Defense Portfolio is doing a perfectly awful job of living up to its name.

Over the past five weeks, we've taken a furious pummeling at the hands of an S&P 500 acting the part of the proverbial 500-pound gorilla. The latest damage report:

Company

Starting Price*

Recent Price

Total Return

General Dynamics (NYSE:GD)

$51.54

$56.44

9.5%

Raytheon (NYSE:RTN)

$42.27

$46.56

10.1%

Lockheed Martin (NYSE:LMT)

$78.28

$75.70

(3.3%)

AeroVironment

$29.96

$28.48

(4.9%)

iRobot

$11.49

$10.77

(6.3%)

Force Protection (NYSE:FRPT)

$4.57

$5.00

9.4%

AVERAGE RETURN

 

 

2.4%

S&P Spyder

$88.17

$99.89

13.3%

DIFFERENCE

 

 

(10.9)

Source: Yahoo! Finance.
*Tracking began on July 10, 2009. Portfolio is equal-weighted, with "recent price" being set at market close on the Thursday preceding publication, and adjusted for stock splits and dividends.

It's almost enough to make a Fool wave the white flag of surrender. But then I remind myself: These stocks never surrender. With that in mind, let's take a look at what happened in the larger defense investing world last week.

Investors blind to AS&E's value
Take Motley Fool Rule Breakers recommendation American Science & Engineering. The stock took a tumble when it became apparent that Wall Street had guessed wrong on fiscal Q1 2010 revenues and earnings. Yet the analysts' disappointment notwithstanding, this manufacturer of high-tech "backscatter" X-ray devices grew its revenues 38% in the first quarter, profits increased 170%, and the company posted $3.9 million in free cash flow versus $9.9 million cash burned last year.

Result: AS&E now has a P/E of just 17.7 (entirely fair when growth is 16.5%). And with free cash flow now tipping the scales at $46.6 million for the past 12 months (41% higher than reported "net earnings"). Subtract out $141 million in cash on the balance sheet, and AS&E's enterprise value-to-free cash flow ratio now sits well below 10. Should investors give up on AS&E just because the analysts have? Hardly. In fact, I am looking at buying more shares at this price. (The Motley Fool's ironclad disclosure policy permitting.)

Checkup on the portfolio
AS&E credited sales to international buyers for its success last quarter, and it isn't alone. On Wednesday, optics specialist FLIR Systems (NASDAQ:FLIR) rode portfolio laggard Lockheed Martin's coattails all the way to a $7 million contract to provide infrared optics to the Indian Air Force. The new systems will be installed on Lockheed C-130J surveillance aircraft. So FLIR can thank one of our Defense Portfolio candidates for the sale. Along with Boeing (NYSE:BA), Lockheed took the lead in opening up the Indian arms market to U.S. contractors earlier this year.

(It wasn't all good news for Lockheed this past week, however. We received sad news from California when a Lockheed F-22 Raptor crashed in the desert outside Edwards Air Force Base on March 25; a recently released government report said that the test pilot passed out during a very difficult maneuver. The Raptor performed up to spec, but the pilot just couldn't take the strain. This serves as further evidence that Joint Chiefs Chairman Adm. Mike Mullen was right when he predicted that unmanned aerial vehicles will eventually replace piloted fighter jets in the U.S.)

Meanwhile, more international news
Recrossing the U.S. border, the biggest news from the past week has to be the report from Friday that the U.S. is now negotiating a $7 billion arms sale to Brazil. South America's contribution to "BRIC" is upgrading its air force, you see, and the Pentagon wants to pitch a fleet of three dozen Boeing F-18 Super Hornets powered by 72 General Electric (NYSE:GE) engines, plus assorted armaments and corollary systems. Dassault and Saab are also in the running for the contract, but if Boeing wins, this deal could be huge. Analysts suggest that over the next 15 years, Brazil will need to buy as many as 100 new fighters to replace its fleet -- pushing the total value of a win here even higher.

All of which has this Fool wondering why Wall Street seems so down on the defense sector these days. If opportunities like the Brazil deal keep popping up alongside domestic defense deals like the anticipated $35 billion KC-X rematch, I really see no reason for these stocks to be sinking.

Foolish takeaway
Intellectually, I know I should be thrilled at the fact that these stocks -- already bargains when I picked them -- are becoming cheaper by the day. Yet no matter how many times I repeat the Warren Buffett mantra: "In the short run, the market is a voting machine. But in the long run, it is a weighing machine" -- losing to the market still hurts.

I'm not used to it. To the contrary, over on Motley Fool CAPS, I have consistently beat the S&P's performance 68% of the time over the past three years. But that, I suspect, is the key -- over the past three years. Sometimes, the market takes a long time to wake up and see the value inside a stock. Eventually, it must recognize the value inside our defense stocks.

Don't surrender too soon.