Two weeks into 2010, Mr. Market's doing his darnedest to show us this rally's still got legs. With the help of a boffo sales report from Ford (NYSE:F), bullish news out of the retail sector generally, and, of course, a few well-placed words of encouragement from Goldman Sachs (NYSE:GS), the new year is off to a strong start.

Will our Defense Portfolio join in the fun? Well, so far it's playing the wallflower at this party ...


Starting Price*

Recent Price

Total Return

General Dynamics (NYSE:GD)




Raytheon (NYSE:RTN)




Lockheed Martin (NYSE:LMT)












Force Protection








S&P Spyder








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.

But there is still hope -- in fact, a lot of hope, as we'll discuss in a second -- that 2010 will be the year that defense stocks shine again. Let's look at a few reasons why, torn from the headlines of last week.

Oshkosh makes trucks, by gosh
Its rivals' sniping notwithstanding, military truck maker Oshkosh gunned its motor again last week, booking a new $290 million order to build 725 heavy trucks for the Army. With every contract it signs -- and delivers on -- Navistar's and BAE's arguments that Oshkosh just can't hack the work grow a little weaker. With the stock selling for 12 times projected earnings, this one might be worth a look.

Boeing's roundtrip international flight
Likewise with Boeing (NYSE:BA). In a blow to the aerospace giant's prestige, the Brazilian Air Force announced last week that it prefers Saab jets over Boeing F-18s. The Brazilian president prefers French fighters. But does anyone think Boeing is worth a second glance?

Actually, yes. At the same time as Boeing was encountering turbulence in the Southern Hemisphere, its flight path smoothed out farther east. The UAE is looking to buy a half-dozen C-17 military transport aircraft. With these birds fetching as much as $250 million a pop, Boeing could be in line for another $1.5 billion in total revenues here.

6 billion humans versus 5 million robots ... and counting
Meanwhile, in less militaristic news, one of our Defense Portfolio companies announced a real milestone: iRobot has just sold its 5 millionth Roomba! (I'd throw 'em a parade, but I'm not sure what's appropriate. Do we toss tickertape confetti ... or nuts and bolts?)

The big picture
Interesting developments, to be sure. But as I promised you last week, we're going to spend the bulk of this column focusing on just one thing that promises to have the most significance for defense industry investors in the years going forward. Today that thing is Iraq.

You remember Iraq, right? We, uh, won a couple of wars there (or at least the "army vs. army on the battlefield" kind)? Well, let's hope the count there sticks at 2-and-0, for while the U.S. military acquitted itself well against Iraq's regular forces in 1991 and 2003, Round 3 might not be so easy. The last couple of times around, the worst our military had to contend with were rusty ol' Soviet-era T-72s. 

But in a surreal Twilight Zone moment, General Dynamics announced last week that it will begin selling M1A1 Abrams Main Battle Tanks to the Iraqi Army. The Iraqis have ordered 140 of the beasts, offering to pay $198 million. And at the same time as this news was breaking, a media uproar exploded over a second Iraqi arms deal, one in which the U.S. government outsourced hundreds of millions of dollars in contracts to U.S. and Russian firms hawking second-rate Russian helicopters for Iraq, Pakistan, and Afghanistan.

Congressmen hailing from districts with significant helicopter-building operations (think United Technologies (NYSE:UTX) and Sikorsky) are squealing in indignation over Russian chopper contracts running more than a year overdue, and prices charged to U.S. taxpayers at twice list price -- this in addition to the picky little detail that it's technically illegal for the U.S. government to buy arms from Russia's export agency, Rosoboronexport. The Pentagon received a waiver to make this deal work.

Foolish takeaway
What's it all mean to investors? Simply this: While professional pundits are warning of an imminent slowdown in U.S. defense spending, and trash-talking the valuations at U.S. defense contractors, they may be missing the big picture.

Will the Great Recession spell a slowdown in U.S. defense spending? Perhaps yes. But at the same time as things decelerate here at home, they seem to be picking up speed abroad. Once a Soviet client-state, Iraq is now taking on a definitive Western bias in its defense spending. In addition to the GD tanks, we recently heard Iraqi political analyst Omar Fadhil Al-Nidawi make a very public plea for weapons systems built by Raytheon and Lockheed.

How big of a potential market could Iraq (and later, perhaps, Afghanistan) become for U.S. contractors? It's hard to put a precise figure on the potential, but remember that Iraq's status as a military titan wasn't all that long ago. As recently as 1990, Iraq boasted the fourth-largest army in the world. It's sitting on top of what some say are the largest oil reserves in the world -- and the value of that oil is spiking, inflating Iraq's wallet in the process.

Does this sound like an opportunity to you? It does to me.

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Fool contributor Rich Smith is does not currently own any stocks named above, but General Dynamics is a Motley Fool Inside Value recommendation and Ford Motor is a Motley Fool Stock Advisor pick. AeroVironment and iRobot are Motley Fool Rule Breakers selections. The Motley Fool has a disclosure policy.