Last week was a weird one for investors. Distressed stocks like AIG (NYSE:AIG) rallied, and the IPO market roared back to life. Meanwhile, news of insider trading patterns that could complicate Dell's (NASDAQ:DELL) purchase of Perot Systems began leaking onto the pages of the Wall Street Journal.

Investors caught a bad case of nerves, and sent the S&P 500 tumbling nearly 2% over over five days of trading. Some Fools are beginning to wonder whether cash might be the safest option in a market like this.

Meanwhile, we intrepid few who brave the embattled defense sector had ... a pretty good week, actually. As the S&P slid, our Defense Portfolio fell behind even farther, after the S&P Spyder paid out a dividend:

Company

Starting Price*

Recent Price

Total Return

General Dynamics (NYSE:GD)

$51.54

$62.28

20.8%

Raytheon (NYSE:RTN)

$42.27

$47.38

12.1%

Lockheed Martin (NYSE:LMT)

$77.69**

$76.95

(1%)

AeroVironment

$29.96

$28.86

(3.7%)

iRobot

$11.49

$12.83

11.7%

Force Protection (NASDAQ:FRPT)

$4.57

$5.51

20.6%

AVERAGE RETURN

 

 

10.1%

S&P Spyder

$87.75**

$105.01

19.7%

DIFFERENCE

 

 

(9.6)

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

Four of our six stocks remain in the green since I picked 'em back in July. But why?

It's not like there's been a lot of boffo news in the defense sphere lately. Mostly, we spent last week twiddling our thumbs, watching our companies net $10 million and $20 million Pentagon contracts -- pocket change for our larger holdings. And we waited and watched for confirmation that the KC-X contest between Boeing (NYSE:BA) and Northrop Grumman was back on. (It is.)

Back to the future
Personally, I used the downtime to review my thinking about the above six stocks -- to make sure that what I thought true about them 11 weeks ago remains so today. I've updated my original investment theses and laid them out for your perusal below.

General Dynamics
Whether you're U.S. Army, Air Force, Navy, or Marines, General D has got your six. On the ground, this company dominates the battlefield with its M-1 Abrams main battle tank. In the air, General D has joined the race to remake our airspace, teaming up with Elbit Systems to manufacture unmanned aerial drones for the Pentagon.

But at sea? Well, "Admiral Dynamics" is sailing some choppy waters here. The U.S. Navy has elected to run a winner-take-all competition for the right to build its next 10 Littoral Combat Ships, which could be bad news for the General. While its version of the LCS looks just as good to my civilian eye as Lockheed's prototype, the Navy seems enthralled with the latter.

Lockheed Martin
Of course, this just illustrates the benefits of diversification. While loss of the LCS contract would be bad news for General Dynamics, it would be correspondingly good news for fellow Defense Portfolio holding Lockheed Martin.

Already possessed of the largest military contract in history -- the trillion-dollar right to build the F-35 Lightning II -- Lockheed has taken some lumps in other areas. Congress canceled plans to purchase more of its F-22 Raptor fighter jets. Getting a lock on LCS would go a long way toward replacing that lost revenue, and provide Lockheed significant sea power to complement its dominant air superiority.

Raytheon
Speaking of lumps, Raytheon cannot be happy about developments in the missile defense space. Its sub-contract on the Kinetic Energy Interceptor project got the kibosh in June. But give these guys credit -- Raytheon knows how to maneuver in the field.

Alongside Lockheed, Raytheon hopes to sell billions of dollars worth of Patriot missiles to countries ranging from Turkey to Iraq to the UAE. Meanwhile, Raytheon looks poised to enter its recently licensed KillerBee into two of the Pentagon's largest UAV contests. Victory in either one could leapfrog Raytheon to the forefront of this nascent industry.

AeroVironment
Speaking of setbacks, AeroVironment suffered a doozy earlier this month. Our star performer in the field of small UAVs reported its first-ever loss. Management promises to repair the damage later this year, but for now we're in wait-and-see mode.

iRobot
While the business is still booming in its PackBot segment, iRobot's total sales were down at last report. We'll be looking for better news when iRobot reports third-quarter results next month.

Force Protection
Last but not least, Force Protection. What can I say, folks? They just keep trooping along.

Force might not yet have met the contract competition it can't fumble. Yet while the biggest Pentagon moneybags keep going to larger rivals like Oshkosh, Force still ekes out a living changing the oil and rotating the tires on its Cougar fleet, and selling the occasional Buffalo minesweeper. Why, just this morning, it sold TACOM another $53 million-worth of the beasts.

Foolish takeaway
So what's the moral to this story? The situation with Force Protection sums it up best: Investors across the markets are down on defense stocks lately. They think Obama's going to kill the industry, and SecDef Bob Gates' repeated appearances, meat cleaver in hand, aren't doing anything to calm their nerves.

But like our Oracle always says, it's time to get greedy when others are fearful. These companies' business success notwithstanding, investors' fear has made defense stocks cheap. I'm ready to go shopping.

Are you? If so,  consider Motley Fool Rule Breakers, where we're looking into options in everything from UAVs to missile defense, from bomb-proof trucks to bulletproof soldiers. 30-day free trials are available on demand.