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These Stocks Can Take Off -- and Some Have

By Selena Maranjian – Aug 2, 2013 at 9:53PM

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Aerospace and defense stocks have been putting up some pretty gains.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some aviation and defense stocks to your portfolio, but don't have the time or expertise to hand-pick a few, the iShares Dow Jones US Aerospace & Defense ETF (ITA 0.27%) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.46%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed reasonably, but it's also very young, with just a few years on the books. It underperformed the S&P 500 in 2008 and 2010, though it beat it substantially in 2007 and 2009. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why aviation and defense?
It's unlikely that our global population will stop traveling by air, or that military powers around the globe will decide they have enough weaponry and equipment. This industry may not grow in a straight line, but it's likely to grow over time.

More than a handful of aviation and defense companies had strong performances over the past year. United Technologies (RTX -0.34%) surged 48%, for example, and recently yielded 2%. Featuring brands such as Otis, Sikorsky, and Pratt & Whitney, it gobbled up Goodrich last year. United Technologies just reported quarterly revenue up 16% over year-ago levels, with earnings per share popping more than 27% and trouncing estimates. The company may soon be building President Obama's new helicopter, too.

Precision Castparts (PCP.DL) jumped 46%, and recently reported quarterly earnings up 23% over last year. Precision has been rearranging itself, selling Primus Composites to Triumph Group, and buying aerospace fluid-fittings company Permaswage for $600 million. The company's supplier relationship with Boeing bodes well, too. Some analysts have been bullish on the company's expected growth, but others see the stock as a bit ahead of itself at the moment.

L-3 Communications (LLL) gained 40%, and yields 2.4%. It just reported second-quarter revenue up 2%, and earnings per share up 5%. Management noted that the company has been affected by sequestration, but not severely so, at this point. Its funded backlog dropped 1%, to $10.8 billion. Recent good news for L-3 is its share of a nearly $1-billion Pentagon IT contract. Its stock was just upgraded from neutral to outperform by Bank of America.

Other companies didn't do quite as well over the last year, but could see their fortunes change in the coming years. Rhode Island-based Textron (TXT -0.09%), which makes Cessna jets and Bell helicopters, along with golf carts and many other things, advanced 14%. It recently reporting underwhelming quarterly results (which did top estimates, for the record) as it burns through a lot of cash. Some see the company as a likely target for activist investors with an interest in breaking the company up. Congress has been asked to approve nearly $2 billion in sales to Iraq, which would benefit Textron.

The big picture
Demand for aviation and defense isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

Longtime Fool contributor Selena Maranjian has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Precision Castparts. The Motley Fool owns shares of Bank of America, L-3 Communications Holdings, and Textron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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