6 Stocks That Never Surrender

Last week's market surge lifted stocks of all types, as evidence began to mount that we've put the age of Lehman behind us. Several members of our Defense Portfolio joined in the exuberance (whether it was rational or otherwise, we'll decide in a few months), but it wasn't all good news ...

Company

Starting Price*

Recent Price

Total Return

General Dynamics (NYSE: GD  )

$51.54

$62.53

21.3%

Raytheon (NYSE: RTN  )

$42.27

$46.22

9.3%

Lockheed Martin (NYSE: LMT  )

$77.69**

$73.56

(5.3%)

AeroVironment (Nasdaq: AVAV  )

$29.96

$26.88

(10.3%)

iRobot (Nasdaq: IRBT  )

$11.49

$12.82

11.6%

Force Protection (Nasdaq: FRPT  )

$4.57

$5.49

20.1%

AVERAGE RETURN

 

 

7.8%

S&P Spyder

$88.17

$104.79

18.8%

DIFFERENCE

 

 

(11.0)

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.
** Adjusted for dividends.

AV gets its wings clipped
The biggest disaster of the week came courtesy of Defense Portfolio sprinter AeroVironment. Reporting its first-ever loss as a public company last week, the company shocked and dismayed those who'd been hoping to see one of its more common "earnings beats."

The good news? AV's sticking with this year's forecast for percentile revenue growth in the high teens to low 20s, says everything's still going according to plan, and insists it will hit its targeted operating profit margin in of 12% to 14%. We shall see.

Tiny companies, big news
But it wasn't all doom and gloom in the small-cap defense camp. iRobot in particular turned in a strong performance on the back of its second straight week of reporting PackBot contract wins. Two weeks back, as you will recall, iRobot booked additional sales on its sizeable $35 million contract to equip the Army with PackBot bomb disposal robots. Well, last week  iRobot did the next logical thing, and won a deal to train the Army to use the 'bots. Total haul: $6 million for parts and trainingPackBot.

Meanwhile, in non-numerical news, Force Protection debuted its latest offering in the category of "cool products that no one's buying yet." Historically, Force's Cheetah has dominated the category -- hawked as the solution to everything from replacing the Army's venerable Humvee, to carting soldiers around the highway-lined potholes of Afghanistan.

Force calls its latest idea a revolutionary "skateboard-and-pod" vehicle called the "Ocelot," which denotes a type of feline, but sounds like something you'd find in a Monty Python flick. Not coincidentally, Force is offering it to the British in the context of the U.K. "Light Protected Patrol Vehicle" program. Let's hope this cat can find its way out of the bag.

Big companies, bigger news
Turning now to the larger companies in our portfolio, General Dynamics sat this week out, while Raytheon and Lockheed moved to the fore.

The week's biggest news involves both companies: The Obama administration has proposed, and Congress is currently reviewing, a possible $7.8 billion sale of Patriot PAC-3 missiles to Turkey. Congressmen who've been stymied in their efforts to funnel government funds to Lockheed for its F-22 fighter jet (killed for good last week in the Senate), and to Raytheon for its subcontracting role in the Kinetic Interceptor (also now DOA), get a second bite at the funding apple. Both Lockheed and Raytheon were named as contractors to build the Patriot batteries, if the sale gets approved.

Christmas in September
And that's just the start. In other Mideast news, The Wall Street Journal ran an editorial by Iraqi commentator and political analyst Omar Fadhil Al-Nidawi last week, calling on Congress to provide Iraq with a robust air defense system. Headlining Mr. Al-Nidawi's wish list: F-16 fighter jets from Lockheed, and -- you guessed it -- Patriots from Raytheon. Merry Christmas to all! (Except maybe the Iranians, who are undoubtedly displeased at the prospect of a rebuilt Iraqi air force.)

Boeing flies high
And last but not least: Boeing (NYSE: BA  ) . Banned from our Defense Portfolio on account of its bottom-heavy balance sheet and lack of free cash flow, the megadefense contractor remains too big to ignore. Nearly every week, it shoulders its way into this column by virtue of its continual headline-making. The latest case(s) in point:

  • The Pentagon just announced that it's finalizing the rules for the latest iteration of the KC-X Tanker race. Will Boeing give better than it gets this time around? Stay tuned.
  • At the same time as the Senate was caving to the president on stripping KEI and F-22 funding from Raytheon and Lockheed, it appears to have defied him in approving funding for 10 new Boeing C-17 transports. Total possible win for Boeing: $2.5 billion.

Foolish takeaway
Wall Street is giving these defense companies little attention, and even less respect lately. But Fools having a longer-term investing horizon will want to focus on the big-picture trends reflected above.

Namely, the Pentagon's showing considerable interest in robotic planes and ground vehicles, and our smaller companies are angling to fulfill that need. Meanwhile, larger defense contractors have set their sights on international growth. The more actively Secretary of Defense Robert Gates wields his cleaver, the more attention we'll need to focus on developments abroad.

Stay tuned.

Fool contributor Rich Smith likes some of these stocks so much that "he bought the company." Namely: Boeing, AeroVironment, and Force Protection. AeroVironment and iRobot are Motley Fool Rule Breakers recommendations. General Dynamics is a Motley Fool Inside Value selection. The Motley Fool has a disclosure policy.


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