Multinational air forces in flight during Operation Desert Shield, 1992. Photo: U.S. Air Force.

The global aerospace industry is a big space, with a lot of moving parts, and a lot of stocks to watch. Market researchers who follow the aerospace industry posit all sorts of numbers of its size:

  • $304 billion annually (for the upper reaches of aerospace -- namely "space")
  • $1.72 trillion annually (for defense products, including warplanes)
  • $5.8 trillion over the next 20 years (for commercial and business jets.

In a market this big, how do you know which stocks to watch? Which are the real movers and shakers?

Narrow the focus
If you ask me, one strategy might be to assume that investors already know all of the above numbers, and have priced the stocks of various airplane manufacturers, parts suppliers, and satellite launchers to accurately reflect the estimates for their various stocks. The real opportunity, therefore, may lie in what might surprise analysts and investors in the future.

Here, I see three possibilities. Three events that could really shake up defense side of the aerospace industry -- and three stocks that would react to the shake-up. Let's run down the list, and we'll start with ...

Textron's Scorpion is a beautiful bird ... still in search of its first buyer. Photo: Textron

Textron (NYSE:TXT)
Already a force to be reckoned with in the fields of military helicopters and civilian airplanes, Textron is trying to take its air force to the next level with an honest-to-goodness fighter jet. Dubbed the Textron AirLand Scorpion, this bargain basement fighter features:

  • twin turbofan engines, producing 8,000 lbs. of combined thrust
  • a 45,000-foot top altitude
  • a top speed of 520 mph
  • six hard points for carrying weapons on its wings (6,200 lbs. capacity)
  • room for 3,000 lbs. more payload in an internal weapons bay
  • a flyaway cost of less than $20 million -- and an hourly operations cost of about $3,000.

That makes it cheaper to buy, and cheaper to operate, than just about any aircraft currently in the U.S. military arsenal. It's so cheap, in fact, that the U.S. Air Force is reportedly considering it as a supplement to, or even a replacement for, its current fleet of A-10 Warthog ground support aircraft.

To date, Textron has not sold any Scorpions, a fact which may lead investors to discount the plane when calculating Textron's attractiveness. But at $20 million a pop, what would a contract, similar in size to, say, India's recent agreement to buy 126 (much more expensive) Rafale fighter jets from France, mean for Textron?

Well, it would be worth nearly 20% of Textron's annual revenue stream. And it would mean additional millions of dollars in maintenance, services, and upgrades contracts for Textron in subsequent years. It would, in short, be enough to "move the needle" significantly for Textron -- and this makes Textron a prime candidate in our list of stocks to watch.

With a last minute contract win, Boeing's F/A-18 Super Hornet is back on deck. Source: U.S. Navy

Boeing (NYSE:BA)
Everybody knows Boeing. The world's biggest pure-play aerospace firm by both revenues and market capitalization, Boeing outweighs rival Airbus by 80% on market cap, and 36% by sales (according to data from S&P Capital IQ). Boeing's also the source of that multitrillion-dollar estimate for the size of the commercial airplanes market you saw up above, and with more than 60% of its business reliant on commercial aircraft, you'd better believe Boeing worked hard to get that number right.

In the aerospace defense sphere, Boeing rakes in $13.5 billion a year in military aircraft sales. Investors may not be giving Boeing full credit for its defense business, however, because the company has suffered a series of high-profile losses in competitions to sell F-15 fighter jets around the world. Orders for its F/A-18 fighter-bombers seemed to be drying up as well, with Boeing warning last year that production could cease as early as next year.

This prediction could prove premature, however, thanks to a last-minute deal to have Kuwait purchase 28 F/A-18E/F Super Hornets. This gives Boeing's F/A-18 production lines at least another seven months' lease on life -- and perhaps more, at a slower production rate.

Meanwhile, as we saw with Dassault's recent Rafale fighter jets sale, just because you lost the last fighter jet competition, doesn't mean you won't win the next one. With just one or two more significant contract wins, Boeing Defense could be back in the fighter jet game yet.

Lockheed Martin's "family photo" of the three F-35 variants (right to left, the Air Force F-35A, Marine Corps F-35B, and U.S. Navy F-35C). Photo: Lockheed Martin

Lockheed Martin (NYSE:LMT)
What could help Boeing get back in the game? That brings us to our third stock to watch -- though this time with a negative outlook: Lockheed Martin.

Ever since it won the Air Force's Joint Strike Fighter competition back in 2002, Lockheed Martin has been America's presumed fighter jet building champion for the 21st Century. Indeed, according to some pundits, the Lockheed Martin F-35 joint strike fighter could very well be the last manned fighter jet we ever build, generating in excess of $1.3 trillion in sales for Lockheed over the next 60 years.

But what if it doesn't?

The F-35's problems, after all, have been well-publicized -- and there have been a lot of them, from engines that catch on fire to stealth that's not all that stealthy to guns that don't shoot. One defense analyst summed it all up in a memorable phrase, describing the F-35 as the world's most advanced airplane that "can't turn, can't climb, can't run."

Now, all new airplanes have birthing pains, and it's entirely possible that what's happening with the F-35 is only natural. A few years from now, we may barely remember the F-35's early flaws, as air forces that possess it dominate the skies, and air forces that don't ... get shot out of those skies. On the other hand, if the F-35's flaws continue to crop up rather than get smoothed out, it's just as likely that a budget-strained Pentagon will decide to cut its losses, and cut short the F-35 program -- just as it did cut short the F-22 Raptor program before it.

If and when that happens, $1.3 trillion (minus a few billion) of potential revenues for Lockheed Martin will go "poof!" And Lockheed Martin stock could go up in smoke. That risk alone makes Lockheed Martin one of the stocks you want to watch ... out for.

Barring a handful of miracles, Lockheed Martin's high-tech F-35 stealth fighter jet could one day go belly up. Photo: U.S. Navy

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.