6 Stocks That Never Surrender

Alas, poor Detroit. We knew it well. No sooner had Ford renewed hope in the auto industry earlier this month, than General Motors came out and deflated our emotional tires last week. But if last week was a rough one for stock investors, then this week is starting off propitiously -- and for none more than investors in the defense industry.

Today's Wall Street Journal led off with an article on how investors are in "retreat," afraid of the "unknown." (Which in strict adherence to Murphy's Law, promised us a green day on Wall Street today.) Yet deeper within its pages, the Journal shone a light of hope for the defense industry, highlighting the attractive valuation of Motley Fool Inside Value recommendation ITT Corporation (NYSE:ITT). Arguing that in any sane market, a sum-of-parts analysis of the firm's defense and industrial arms should yield a stock priced more than 10% above where ITT's trading today, the Journal declared "ITT's valuation deserves a second look."

And indeed, investors are giving the whole of the U.S. defense industry that second look today, as we see the sector surging back to gain back ground lost to the S&P 500 in previous months:

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

Dateline: Dubai
What's got investors feeling gung-ho about defense? Well, over in the Persian Gulf, Boeing (NYSE:BA) gave some cause for hope when it narrowly avoided a shut-out to its arch-Euro-rival. The first few hours of the 2010 Dubai Air Show were dominated by news of multiple contract wins by Airbus. Yet by show's end, Boeing also managed to walk away with nearly a dozen 737-800 orders. In actual dollar figures, the $800 million or so in list prices were a relative pittance, but by this point, every little bit of good news helps.

Even better news was Emirates Air's suggestion that it may be willing to "step into the shoes" of Boeing customers who decide to delay or cancel their plane orders. If EA means what it says, we could discover that the string of cancellations Boeing has experienced of late, is not quite as bad news as it seems.

Nor was Boeing the only U.S. winner over there. Honeywell (NYSE:HON) ended up with $500 million in sales at the show, and predicted this year will see it ink another $500 million in Mideast deals, while General Electric (NYSE:GE) booked $180 million more (through its joint venture with France's Safran.)

East of Middle East
Shifting our gaze even farther east, a report out of Reuters over the weekend suggested that not only is Japan still interested in buying an export version of Lockheed Martin's (NYSE:LMT) F-22 Raptor -- it's also looking for a few good F-35s. 40 of them, to be precise, which would replace some of Japan's F-4 Phantoms that are getting a bit long in the tooth. That's bad news for Boeing, by the way, which built the planes (though acquisition McDonnell Douglas) and presumably makes the parts to keep 'em flying. But it's good news indeed for an embattled Lockheed.

Just one thing
Over the short period of time that we've been monitoring the industry by way of this column, these stocks have lagged the market substantially. But as investors with a long-term focus, we're going to do our best to avoid these short-term fluctuations, and focus on the big picture.

That's why today I'm introducing a new feature to this column: Just one idea for you to focus on in charting the long-term progress of your defense holdings. Today, that idea is China. (And missiles. And lasers.)

China's Carrier Killer
Bloomberg revealed last week that the Chinese military is close to fielding "the world's first anti-ship ballistic missile" (ASBM) -- a missile with the express purpose of killing U.S. aircraft carriers (or rather, threatening to do so). With a reported 900-mile range, the new ASBM has the potential to make much of the Pacific and Indian Oceans a "no-go zone" for the U.S. Navy.

But what's bad news for the USN may be good news for BA investors. It is the nature of arms races, after all, that capabilities give rise to solutions. Just as China's fear of U.S. naval power gave birth to an ASBM, therefore, we will eventually see our own solutions to the new missile threat. In my humble, Foolish opinion, one such solution will be Boeing's series of advances in the field of anti-aircraft laser systems.

So far, most of Boeing's announcements in this field take the form of successful tests and small contract grants. Over time, however, such successful trial data should give rise to contracts, sales, revenues, and profits for Boeing investors. Stay tuned, and never surrender.