Defense is a "mature" sector - it's at least as old as the Battle of Megiddo, fought more than 34 centuries ago. But you and I both know it's probably much older than that.
During that battle, the very first one we have a reliable record of, in 3457 BCE, the world-beating military technology was... bronze, horses, and chariots.
The world has changed, obviously, but the need to go to war from time to time hasn't.
Let me be clear: I think war is a waste. It's a failure of imagination and communication. It's stupid; a great destroyer of value, capital, and most importantly, human life.
It is a truly horrible idea, but at times it's necessary to fight, be it in self-defense, or to preserve your way of life.
I wish I were wrong, but I am not. As much as you or I or any other thinking person might wish it would go away, it's not... at least not anytime soon.
And the tiny, undervalued companies I'm about to tell you about will help make sure we're ready for the next one...
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Here's What I'll Say in Defense of Defense
You can be averse to war and conflict, as I am, but the truth is, the defense sector is a critically important one. Beyond the need for, well, defense, dozens of technologies that make our lives better, easier, safer - take your pick - in peacetime have emerged because of it.
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What's more, the defense sector sustains a huge chunk of our economy right now, employing hundreds of thousands of people, feeding families all over the country.
So, as much as I loathe the idea of war, I'm very bullish on the defense sector
Billions of dollars will be spent to keep the U.S. military strong enough to discourage the bad guys from trying to impose their will on their neighbors, or expand their territory by force of arms.
The War on Terror is not going away anytime soon, and a strong military is a vital part of preventing future attacks. Global military spending reached $1.7 trillion in 2017; the United States alone is responsible for around $695 billion of that huge outlay.
While there's no shortage of military and defense stocks you can invest in, very few - a small handful, really - are worth your money, packing the potential for unreasonably high returns.
These stocks represent a bargain "double play," and they fulfill all of my "Max Wealth" rules for buying...
Any General Will Tell You: Logistics Is Everything
One of the more direct beneficiaries of all this military spending is Vectrus Inc. (NYSE: VEC).
The Colorado Springs--based company provides facilities and logistics services to the U.S. military. It does everything from airfield and ammunition management to equipment maintenance and repair. It also offers IT services, including important cybersecurity and data-management systems. It knows its market pretty well since more than 35% of its 6,700 employees are former military.
The business is growing nicely right now, too.
Revenue in the first quarter was up more than 10%, and the backlog of contracts to be filled rose by more than 13% to $3.3 billion. Vectrus won contracts to provide base maintenance support services at Sheppard Air Force Base in Texas and another one to provide maintenance services for the installations of the U.S. Army Garrison in Stuttgart, Germany.
As of the end of the first quarter, Vectrus has $1.4 billion of proposals submitted and pending potential award, and management has identified an additional $8 billion in potential projects they will be trying to win.
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It's simple: The military needs external support to function, and this company can help it run its bases and move supplies from where they are to where they need to be.
Vectrus can help the military use and protect technology more efficiently. It will be well paid for doing so, and that's going to drive consistent profit growth, which over time will push the stock higher.
Plus, it sports a perfect Money Morning VQScore™, which makes it one of the best buys on the market today.
I would buy a little at current levels and a lot more should the shares decline in a broad market sell-off in the second half of the year.
Keep some dry powder on hand for this company, too...
This Firm Keeps All Kinds of Birds Flying
Ducommun Inc. (NYSE: DCO) is another company that does a lot of business with the U.S. military, and our VQScore system considers it a buying opportunity right now.
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Ducommun makes electronic components for military aircraft and missile systems. It also supplies structural parts for both rotary and fixed-wing aircraft used by the military.
While Ducommun also works with commercial aviation and industrial companies like Boeing Co. (NYSE: BA) and Gulfstream, 57% of its revenue and 73% of its current business backlog comes from the U.S. military and space programs.
Over the past few years, management has exited weak business deals, reinvesting the profits in its faster-growing businesses.
According to CEO Stephen Oswald, it's already working. He said on the first quarter conference call, "I'm proud of the steady improvement here at Ducommun. I think it should be noted by investors that we reduced cost by $14 million this year. We're expanding margins, driving top line and bottom line improvements, winning new business. We're going through acquisitions and reaching record backlog levels."
Importantly, management has skin in the game here, too. They collectively won almost 1 million shares of stock in the company. All principal officers and directors own shares in the company, so the better they execute, the richer they become.
I love to see that in a company, because it usually means we'll get richer alongside them.
This is a stock that I think you can own for a very long time, paying you unreasonably high profits the whole way.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.