Stocks to Buy: Meet the New Defense Winners

One segment of the stock market that is widely ignored right now is the defense sector – but as contrarians know, that means there are hot stocks to buy now if you know where to look.

The reason defense is shunned is that future defense budgets will be cut to rein in government spending and hopefully reduce the U.S. budget deficit.

Some programs have been hit by the sequester. Other initiatives are winding down as the endless flow of dollars that has been seen since 9-11 is slowing.

The most recent budget proposals call for reducing defense spending by an additional $150 billion over the next 10 years. That's on top of the $487 billion of cuts already in place and the $41 billion spending cuts mandated by the sequester.

All of this has dampened enthusiasm for defense stocks. While some of the larger defense companies have rallied this year most of the sector has been moribund and is lagging the overall stock market. It is very difficult for analysts and investors to determine which stocks will make attractive opportunities when no one yet knows exactly how much may be cut from the overall budget.

But not all stocks will suffer.

It is important to keep in mind that in Washington speak, "cuts" means reduced increases in spending, not an elimination of spending. Money will still be spent and select defense contractors will directly benefit.

And there are tools available to gain an edge and help determine which defense stocks to buy now.

Stocks to Buy: How to Pick the Next Defense Winners

The first way to determine the best defense stocks to buy is to concentrate on companies involved in those projects and systems that will be considered essential and unlikely to see reduced spending.

For example, the military as well as Homeland Security and various intelligence agencies are committed to the use of unmanned surveillance vehicles as well as weapon delivery systems. These vehicles commonly known as "drones" will see increased usage and the programs will greater spending in the years ahead.

While industry giants Lockheed Martin Corp. (NYSE: LMT) and Northrop Grumman Corp. (NYSE: NOC) will be involved in these projects, the real profit pop could come from smaller companies. Those include CPI Aerostructures Inc. (NYSEMKT: CVU) and AeroVironment Inc. (Nasdaq: AVAV), which have significant operations involving unmanned aircraft.