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.

Cybersecurity and cyber warfare capabilities are becoming an increasing priority as well. It seems the cyber-attacks emanating from Asia and the Middle East are happening every day.

U.S. Defense Secretary Chuck Hagel recently called cyber-attacks the single greatest threat to our national security. Cyber warfare can attack not just buildings and people but freeze financial markets and cripple communications as well as other critical infrastructure.

The build out of a cyber-protection and attack system will require an enormous effort and money to build and some companies will benefit. Companies like Sourcefire Inc. (Nasdaq: FIRE) and Kratos Defense & Security Solutions Inc. (Nasdaq: KTOS) should see increased federal dollars to help build cyber warfare systems.

The other way to uncover promising investments in the defense sector is to keep on top of contracts awarded by the defense department to publicly traded companies. The awarding of most contracts by the Defense Department is not exactly secret. They can be found online and are announced each day at 5 p.m. if the contract value is more than $6.5 million.

The DOD contract announcements can be found online at

This takes some research, but companies that regularly win contract awards should be able to maintain consistent revenue and profit growth even in an era of reduced spending.

For example, when you see that a company like shipbuilder Huntington Ingalls Industries Inc. (NYSE: HII) is wining a steady supply of new work with more than $3.5 billion in new contracts awarded in the past month alone, you can have greater confidence in the future of the company.

Keeping track of contract awards and spending priorities inside the DOD can help investors spot the stocks to buy now that will provide profits over the next decade.