Three Defense Stocks to Buy in 2015

The list of good defense stocks to buy in 2015 is growing.

Defense is always an important industry. It's a "need to have" instead of a "nice to have."

aerospace-and-defense-stocks-to-buy-2015Military drawdowns in Afghanistan don't change this. Cuts to the Pentagon budget don't either.

"War, Terrorism, and Ugliness," Money Morning Chief Investment Strategist Keith Fitz-Gerald said, make defense stocks a Buy. They comprise one of six unstoppable investing trends he covers in his Total Wealth research service.

"War, Terrorism, and Ugliness are hardly happy-go-lucky subjects, so I don't want to convey the impression that I'm taking the misfortune that comes with them lightly," Fitz-Gerald said. "In fact, many of my choices in this sector are ultimately aimed at peace, health, and prosperity. In that sense, they are truly game changers. They can help us figure out how to keep the very things driving this unstoppable trend - War, Terrorism, and Ugliness - from happening more often."

War, Terrorism, and Ugliness aren't going away anytime soon. They outlive budget fights in Washington, and defense companies know this. They have for more than a century.

2015 will be no different. Syria is still in a civil war. The Islamic State has not been "degraded," as U.S. President Barack Obama pledged, and certainly hasn't been "destroyed." Tensions are high on the borders of Ukraine and Russia.

Defense companies will have their work cut out for them in 2015.

For investors, that means it's time to profit from "need-to-have" defense stocks. Here are your three best bets...

2015 Defense Stocks to Buy No. 1: Raytheon Co.

There's no better defense play right now than Raytheon Co. (NYSE: RTN). Defense cuts are slated for the years ahead, but Raytheon will make out fine.

It's the standard bearer of "standoff warfare."

"What this means in plain English is that our military is transitioning to hyper-accurate weapons that can target enemies from miles away, keeping our service members out of harm's way until they absolutely have to personally engage," Fitz-Gerald said. "That way, they can limit resources and exposure while still achieving maximum effectiveness on target."

Procurement trends favor stand-off warfare. And Raytheon's missile systems stand to gain.

Raytheon sees an encouraging trend for its STANDARD missile family. These missiles provide anti-air defense for cruisers and destroyers.

In 2013, U.S. acquisitions totaled $332.5 million. They climbed to $454 million in 2014, then jumped to $515.2 million in fiscal year 2015.

Similarly, the Air Intercept Missile-9X saw funding climb. Starting from $178 million in 2013, it soared to $244.6 million in 2014 and finally to $297.8 million in 2015. Small Diameter bombs, Evolved Seasparrow missiles, and Rolling Airframe missiles will enjoy stronger investment too.

That all goes without touching on Raytheon's overseas business. Foreign sales made up 27% of Raytheon's 2013 revenue. Customers include India, Turkey, Kuwait, United Arab Emirates, and Saudi Arabia, according to Morningstar. This will cushion it from U.S. defense cuts.

Money Morning Members, keep reading to see the next two defense stocks to buy in 2015.

2015 Defense Stocks to Buy No. 2: Lockheed Martin Corp.

Defense giant Lockheed Martin Corp. (NYSE: LMT) will take a hit from budget cuts, but still has a lot to offer investors.

Its $4.1 billion in cash flow in Q3 2014 will be used for crucial peacetime investments.

"These guys have learned from our history - at the end of every shooting war, defense budgets come under sharp attack in a politically tough environment," said Money Morning Defense & Tech Specialist Michael A. Robinson. "Lockheed Martin's reach also includes space exploration, satellite systems, and climate monitoring. Not only that but it's a whiz at biometric and cyber security as well as the booming field of cloud computing."

Lockheed also secured a big win this year in space: a $900 million contract to construct the so-called "Space Fence." The Space Fence is a sensitive, advanced radar system. It is capable of detecting at least 200,000 objects floating in space - some the size of a baseball. It will reach operational capability in 2017.

2015 Defense Stocks to Buy No. 3: Kratos Defense & Security Solutions

Kratos Defense & Security Solutions Inc. (Nasdaq: KTOS) doesn't have name recognition. It's no Lockheed or Raytheon.

And that's what makes it so exciting.

Kratos is a different kind of defense company. It isn't competing with the big boys for lucrative contracts. Kratos stays within a range of $1 million to $15 million, with no single contract accounting for more than 6% of revenue.

"That makes Kratos' contracts very easy to approve in a budget, especially when compared to the multi-billion budget items that come under intense scrutiny," Fitz-Gerald said. "They're almost all high-tech or in support of high-tech mission profiles, which means they represent a critical need rather than a pork program that politicians want to keep alive so they can get re-elected."

Kratos was beat up toward the end of the year. It traded up above $9 in June and is now around $5.

Kratos' recent struggles have come as a result of an earnings miss that Fitz-Gerald said was not the company's fault. It was hamstrung by competitor bid protests on awarded contracts as well as delays in orders and awards, according to recent Securities and Exchange Commission filings. In short, it's an unloved stock.

But its $5 price tag is cheap - real cheap. While Raytheon and Lockheed Martin trade around $110 and $195, respectively, Kratos is a steal. And Fitz-Gerald sees it soaring to $10 in 2015.

Bottom Line: "War, Terrorism, and Ugliness" will unfortunately be as pervasive a trend as ever in 2015, but it does provide for a good mix of exciting trades. That means defense stocks are a Buy in 2015, and the offering is impressive. Raytheon is a pure defense play that will benefit most from "standoff warfare." Lockheed Martin will weather budget cuts with its investments in impressive peacetime technologies. And Kratos is a hidden gem among the big players with a lot of upside.