Defense Stock Surge Ignores Possible Budget Cuts

By Cgblaine22 Published Feb 24, 12:45PM EST

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Apache Block III Ceremony and First Flight

Defense Secretary Chuck Hagel was to release a budget proposal Monday that would reduce the size of the U.S. Army to levels not seen since before World War II.

So, what did defense stocks do? They rallied. In fact, as a group, they were performing better than the stock market overall. The iShares U.S. Aerospace and Defense ETF (NYSEMKT: ITA) hit a 52-week high of $110.66, up 1.8%. The Standard & Poor’s 500 Index was up 1.2% to 1,859.

The stocks are performing well because the Defense Department envisions warfare being waged using enhanced technologies. Plus, many military contracts cannot be scaled back easily. And defense stocks also offer decent dividends.

Hagel’s budget proposal, according to The New York Times, envisioned the army’s full-time complement of soldiers dropping to 440,000 to 450,000. That would be the lowest since 1940. The army had been scheduled to drop to about 490,000 from a peak of 570,000 after the Sept. 11, 2001, terror attacks.

The proposal eliminates the Air Force’s entire fleet of A-10 jet fighters, originally designed to attack Soviet tanks in Europe. It moves Apache and Blackhawk helicopter fleets, now with the National Guard, to the regular army.

It does continue funding for Lockheed Martin Corp.’s (NYSE: LMT) F-35 fighter jets, already controversial because of massive cost-overruns and a price of $160 million each. And it assumes the U.S. Navy will continue to maintain a fleet of 11 aircraft carriers.

Here’s how the stocks are faring.

Boeing Co. (NYSE: BA), up 1.5% to $130.11. About half of Boeing’s revenue comes from military spending. The shares are up 78% from their 52-week low and only 10% below its 52-week high of $144.57.

Lockheed Martin, up 2.2% to $167.74. The F-35 is just one of many military planes the company makes. The stock is up 95% from its 52-week low of $85.91 and is trading about 0.3% below its 52-week high.

General Dynamics Corp. (NYSE: GD), up 1.8% to $109.24. It is best-known for building submarines, combat vehicles and weapon systems.

Northrop Grumman Corp. (NYSE: NOC), up 2.2% to $123.06. Among its many products are drones.

Raytheon Co. (NYSE: RTN), up 2.4% to $98.99. It is a major supplier of missile systems to the Defense Department.

Huntington Ingalls Industries Inc. (NYSE: HII), up 1.4% to $99.46. This is one of the prime contractors for nuclear-powered and non-nuclear ships for the U.S. Navy. Hagel’s budget proposal sees the Navy buying two destroyers and two attack submarines each year.

About the Author cgblaine22 →

Charley Blaine is a veteran financial journalist. He wrote about markets and edited personal finance articles at MSN Money. He was editor of Family Money magazine and business/financial editor at The Times-Picayune and a Money reporter at USA Today.