Welcome back, Fools, to Week 4 of my mano-a-mano melee versus Mr. Market. And let me rip the bandage right off: I'm getting mauled.

After sprinting out to an early lead, the Defense Portfolio stumbled in Week 3, and has yet to find its footing. Mr. Market has raced ahead and taken a commanding lead, outperforming my six picks by 8.8 percentage points:

Company

Starting Price*

Recent Price

Total Return

General Dynamics (NYSE:GD)

$51.54

$55.13

7.0%

Raytheon (NYSE:RTN)

$42.27

$47.42

12.2%

Lockheed Martin (NYSE:LMT)

$78.28

$74.65

(4.6%)

AeroVironment

$29.96

$29.18

(2.6%)

iRobot

$11.49

$10.41

(9.4%)

Force Protection (NYSE:FRPT)

$4.57

$5.29

15.8%

AVERAGE RETURN

 

 

3.1%

S&P Spyder

$88.17

$98.67

11.9%

DIFFERENCE

 

 

(8.8)

Source: Yahoo! Finance.
*Tracking began on July 10, 2009. Portfolio is equal-weighted.

Was this idea ill-conceived from the get-go? It's sure looking like it. And yet, I cannot fault any of these six companies individually for the manhandling that's been done to their stock prices; the whole defense industry has been strafed and left to burn. Earnings season for the defense sector continued last week, and the news was grim, as:

  • Profits dropped 17% from a year ago at Rockwell Collins, and earnings from continuing operations plunged 12% at Orbital Sciences.
  • Spirit AeroSystems and Oshkosh (NYSE:OSK) both reported losses.
  • As did ceramic-armor maker Ceradyne and aerospace tycoon Textron (NYSE:TXT).

But there was good news to report as well. Hum along with me the Marines' Hymn as we cover the latest developments:

In the air ...
Boeing followed up on the previous week's "earnings beat" by inking a contract win for its Commercial Aircraft division in Ethiopia (of all places). Meanwhile, the military side of things unveiled its new sub-hunting P-8A Poseidon aircraft. The U.S. Navy has put in an order for 117 of the new birds, with deliveries scheduled to begin in 2013.

Meanwhile, over in Congress, the politicians are doing their level best to shower Boeing with cash in spite of the president's protestations. The Senate may have given the Obama administration everything it asked for in its version of the 2010 defense appropriations bill, but over in the House, congressmen are busy horse trading. Under threat of presidential veto, they stripped out $369 million in funding for additional Lockheed Martin F-22 fighter jets. But they kept funding for an "alternate" F-35 engine built by General Electric (NYSE:GE) and Rolls-Royce, and approved funds to buy three unrequested C-17 military transports and nine F-18 Super Hornets. Each of which is built by -- you guessed it -- Boeing.

… on land ...
Defense Portfolio land warrior General Dynamics posted a small increase in earnings for the second quarter. What's more, the company looks well placed to profit in future quarters, as its backlog of work to be done increased at twice the pace of revenues received for work actually performed in the quarter. Good times ahead.

Elsewhere on the ground, Defense Portfolio standout Force Protection landed a $53 million contract to build 48 Buffalo mine-clearing MRAPs for the Army. Remind me again why everyone thinks this company can't win contracts?

Meanwhile, the firm that supposedly put a ceiling on how high Force can rise -- Oshkosh -- helped repair the damage inflicted by its quarterly loss when it won a second order for M-ATV production from the Pentagon. And the best news? When Oshkosh won the original bidding war to build the M-ATV, it was awarded $1.05 billion to build 2,244 vehicles. Last week's order, in contrast, calls for Oshkosh to manufacture 1,700 M-ATVs for ... $1.06 billion.

You read that right. They're building 544 fewer vehicles than in the first tranche -- and they're getting paid more for it by throwing in some choice aftermarket parts and field support service. Nice work if you can get it.

... and by sea (maybe?)
Sorry. No naval developments this week -- unless you count Boeing's Poseidon. But we'll close out this column with something even more interesting: rayguns!

On Friday, Textron announced that it is setting up a Directed Energy Weapons division. Now, before you get too excited, bear in mind that Textron is coming late to this party. Pretty much everyone else in the industry already has a raygun project or two in its holster:

  • Lockheed, Northrop Grumman, Raytheon, and Boeing have all teamed up to create a flying laser mounted on a converted Boeing 747.
  • In addition to its airborne laser, Boeing's working on ground-based lasers capable of shooting down airplanes.
  • Northrop, which builds the "shootin' end" on the airborne laser, is also developing a ground-based weapon.
  • And Raytheon already has a working microwave weapon.

So I guess what I'm saying is "good luck catching up, Textron."

Foolish takeaway
And with that, we draw the curtain on another week in defense investing. Will future weeks treat these stocks any better? It depends.

To my mind, these companies aren't performing poorly because of mistakes they've made. Rather, their relative underperformance owes to investors getting enthusiastic over supposed green shoots sprouting elsewhere in the economy. While I'm certainly not rooting against a broad-based economic recovery, I'm convinced that my six star defense companies will perform just fine in any economy

Here's hoping.

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