After decades of working with defense technology companies, I know the ebb and flow of military spending all too well.
I remember that when the Cold War came to an end, the nation's political leaders were talking enthusiastically about the so-called "peace dividend."
That's Washington-speak for Pentagon budget cuts that always seem to come after a major conflict has ended.
Many investors believe that with our presence in Iraq largely gone, defense firms will offer mediocre returns at best.
I'm not buying into it. I think massive profit opportunities are there. And the market and the government are lining up behind them…
Not Just a Bull, a National Imperative
Fact is, earlier this decade, several key defense contractors saw there were tough times ahead and revamped operations to do well with lean budgets.
More to the point, as current dramatic news makes all too clear, the U.S. needs a strong global military presence with an army, navy, air force, and Marine Corps second to none.
The escalating conflict in Ukraine is a great example of why the U.S. must maintain a strong defense structure. It includes the ability to support NATO allies against incursions into Europe.
But that's not the only global threat we face…
Look at how aggressive China has become in its demand to control the South China Sea. Not only that, but North Korea's unstable regime remains a looming threat.
So, while many investors are looking at other sectors because of the ongoing Washington budget battles, defense stocks as a group have greatly outperformed the overall market.
Here's the thing. I grew up in a military household and have followed defense technology my entire career as an analyst.
In fact, I was in the tech trenches during the 1980s when President Reagan broke new ground with his tech-centric Strategic Defense Initiative, more commonly known as his "Star Wars" program.
So, I have seen first-hand the Pentagon and its prime contractors adapt to budget cuts and come back stronger every time. And they are brimming with advanced technology that gives America defense superiority.
Back U.S. Defense and Reap Huge Gains
What we want to do is take advantage of the all the opportunities to profit from tech breakthroughs and weapons programs that will permeate the entire sector.
That's why I think investors would do well to take a good look at PowerShares Aerospace & Defense (NYSE: PPA). This is a cost-effective ETF made up of 80% defense and aerospace stocks from companies who are proven leaders.
The fund has a solid mix of companies, including cutting-edge small caps like FLIR Systems Inc. (Nasdaq: FLIR), the world's predominant maker of commercial thermal-imaging cameras.
There's also the advanced materials firm Hexcel Corp. (NYSE: HXL), which supplies honeycomb composites to some of the biggest names in the aerospace industry.
But the heart of this ETF play is found in its top 10 holdings.
They include many well-capitalized companies that have succeeded for decades regardless of Washington's defense budget battles.
Raytheon Company (NYSE: RTN) is a full-spectrum company that provides the Pentagon with systems for electronic warfare, laser rangefinders, military training, and advanced radar.
About the Author
Michael A. Robinson is one of the top financial analysts working today. His book "Overdrawn: The Bailout of American Savings" was a prescient look at the anatomy of the nation's S&L crisis, long before the word "bailout" became part of our daily lexicon. He's a Pulitzer Prize-nominated writer and reporter, lauded by the Columbia Journalism Review for his aggressive style. His 30-year track record as a leading tech analyst has garnered him rave reviews, too. Today he is the editor of the monthly tech investing newsletter Nova-X Report as well as Radical Technology Profits, where he covers truly radical technologies – ones that have the power to sweep across the globe and change the very fabric of our lives – and profit opportunities they give rise to. He also explores "what's next" in the tech investing world at Strategic Tech Investor.