Market Report: Investing in Defense Stocks: I Know Who Will Win in 2008

“Only Nixon could go to China.” It’s a truism commonly used to describe how only someone with impeccable credentials in a certain area could work against the grain and still be trusted. In Nixon’s case, his reputation as a rabid anticommunist ensured that no one could point a pink finger at him when he decided to seek a rapprochement with Mao and his minions.

A modern version of that credo might read something along the lines of “Only General Powell could slash the defense budget.” No one could point a finger at this former chairman of the Joint Chiefs of Staff and claim that he lacks military credibility. However, Colin has repeatedly refused draft efforts, and most all of the folks who are running for president in 2008 are in dire need in this area.

Democratic candidate Rudy Giuliani -- oops, sorry, he changed affiliation a couple of times back in the 70's and ‘80s, so let’s make that leading Republican candidate -- ginned up a law school deferment to duck out on Vietnam. Kind of puts a dent in his hawkish reputation. (Rudy does seem to have a bit of an identity crisis: His dad, Harold Angel Giuliani, served time in Sing Sing and is reputed to have been an enforcer for his brother-in-law, Leo D’Avanzo. But hey, let’s not start casting aspersions for the acts of relatives or in-laws here.)

Republican Mitt Romney was attending college, too: Stanford, Brigham Young, Harvard Law and Harvard Business and 30 months as a missionary in France qualify him for all sorts of things, but an expert on the military ain’t one of them. He was in charge of the Massachusetts National Guard, though.

On the other side of the aisle, Barack Obama is too young to remember the draft, and has shown no inclination toward volunteering for armed service. He states that he has always been against the Iraq war, especially before he was in office, when he couldn’t actually vote on it one way or the other. And Hilary Clinton has the unique excuse that we simply forbade women of her generation from serving in the active military.

Yeah, yeah, I know: I forgot to mention Senator (and Captain) John McCain. Yes, he is the son of an Admiral (and grandson of another admiral, for that matter) and the recipient of the Silver Star, Bronze Star, Legion of Merit, Purple Heart and Distinguished Flying Cross. His campaign is also dead broke, so it is not particularly likely that he will get the chance to address this issue. And if by some rare fluke, he manages to beat the money game and win on sheer guts and stump speeches, he has already indicated that he would ask for even more cash for the Pentagon than the billions President Bush is asking for each month.

And that’s my point here: Maybe the next president will cut domestic spending, may be not. Maybe he or she will raise taxes, and maybe not. But the one thing the next president will not do is cut the defense budget. In fact, to shore up their weak reputations in this area, they are all promising to boost spending considerably.

With that in mind, I have been recommending military stocks for about four months. Since I began beating this particular drum, Northrop Grumman (NOC: NYSE) has picked up 8%, Raytheon (RTN: NYSE) gained 18% and United Technologies (UTX: NYSE) has added 8%.

Current WOW pick L3 (LLL: NYSE) has just declared a 21% growth in third quarter earnings and is setting a new all-time high. LLL shares are up 11% since I first mentioned them in September, pushing WOW readers’ calls against same to 93% gains over some 60 days.

I don’t really know which candidate will win next year. But I do know which group of companies will win hands down.

Adam