My childhood family dinner conversations were a bit different than most folks’.
Sure, we talked about school, sports, neighborhood gossip, movies – normal stuff. But we also talked about military contractors, weapons systems, and defense budgets.
That’s because my father was the award-winning senior military editor for Aviation Week & Space Technology magazine, the bible of that industry. And that gave me a front-row seat for the military de-escalations and escalations of the 1970s and 1980s.
Therefore, when last year President Donald Trump called for raising the fiscal 2018 defense budget by 10%, I took notice.
Without doing the math – thanks to those long-ago family dinners – I knew immediately that this would represent the biggest defense budget increase since the Ronald Reagan years.
President Trump wants more airplanes, tanks, and troops as well as technology for missile defense and a wide range of other platforms. And that means 2018 is stacking up to be the best year for the defense industry – and its investors – since 1981.
That gives us a target-rich profit opportunity for this New Year.
But there’s more to come.
A lot more.
That’s because, even beyond President Trump’s historic budget increase, I see multiple catalysts – “triggers” – that will power the defense industry to continued new highs.
So today, let’s look at those 2018 defense catalysts.
Then I’ll show you how to play them with an innovative market-crushing investment…
Get Rich – Regan-Era Style
The Trump White House is taking a page right out of President Reagan’s playbook. When Reagan took office in January 1981, he sought to rebuild a military depleted by years of war and tough congressional budgets.
Trump took office in January 2017 after campaigning on a defense buildup from a budget of around $580 billion. He said he wanted to beef up the military after prolonged battles in the Middle East and annual budget fights on Capitol Hill that limited weapons spending.
Trump is far from alone in his defense ambitions.
In November, the U.S. Senate passed a 2018 military spending bill worth $700 billion, a figure that’s more than what Trump had sought. While Congress and the president will battle over the fiscal 2018 budget later this month, I fully expect Trump and the Republicans to get most of what they want on defense.
We can expect to this to be a long-term trend. Trump wants to increase the defense budget another $683 billion over the next 10 years.
But the year ahead should be particularly good for defense investors because of these four key “triggers” I’ve identified. Take a look…
The Big Four
2018 Defense Profit Trigger No. 1 – North Korea will dominate the headlines in 2018 – it already is – and not just because the rogue nation keeps testing long-range missiles and is building a nuclear arsenal. The 2018 Winter Olympics take place in PyeongChang, South Korea, just a 268-mile drive from its border with the North. This is going to lead to ongoing talks among the United States and the East Asian powers – and rising spending on defense in the region.
2018 Defense Profit Trigger No. 2 – Missile defense is closely related to the situation with North Korea. Not only is there a growing sense that we need to be able to shoot down that country’s missiles, but the Pentagon wants that technology to become pervasive, meaning we should be able to defend against multiple missile launches from anywhere.
2018 Defense Profit Trigger No. 3 – Hypersonic technology. As part of its own military buildup, China plans to start testing hypersonic weapons and aircraft – soon. Traveling at 7 miles per second, hypersonic missiles could hit the U.S. mainland in 14 minutes. China isn’t alone here. Last September, we learned that Orbital ATK Inc. (NYSE: OA) – which Northrop Grumman is in the process of acquiring – is helping the Pentagon develop hypersonic aircraft that can fly at more than five times the speed of sound.
2018 Defense Profit Trigger No. 4 – Cybersecurity. Most folks don’t know this but the Pentagon and defense contractors are already at war – a cyber war that is. Hackers from around the world, but especially from Russia and China, try to steal our military secrets on an hourly basis. For 2018, I’m looking for the defense department to put renewed emphasis on protecting its computer networks as well as electronics from hacking.
Now here’s how to play all these catalysts – along with the historic defense budget hike…
Take a good look at the PowerShares Aerospace & Defense (NYSE Arca: PPA). This cost-effective exchange-traded fund (ETF) is made up of more than 50 proven defense and aerospace leaders.
The fund has a solid mix of companies, including… fast-moving small caps like FLIR Systems Inc. (Nasdaq: FLIR), the world’s predominant maker of commercial thermal-imaging cameras.
There’s also the advanced materials firm Hexcel Corp. (NYSE: HXL), which supplies honeycomb composites to some of the biggest names in the aerospace industry.
Aerovironment Inc. (Nasdaq: AVAV) is a leader in drone technology that supplies the Pentagon with unmanned aerial vehicles (UAVs) used for battlefield intelligence gathering.
But the heart of PPA is found in its Top 10 holdings…
They include many well-capitalized companies that have succeeded for decades regardless of Washington’s defense budget battles.
These firms are primed to take advantage of President Trump’s plans for more soldiers, aircraft and ships as well as advanced technology.
Raytheon Co. – PPA’s sixth-largest holding, with a weight of 5.6% – is a full-spectrum company that provides the Pentagon with systems for electronic warfare, laser rangefinders, military training, and advanced radar. Plus, Raytheon’s intercept vehicles, radars, and space sensors work together to protect the United States and its allies against ballistic missiles, cruise missiles, aircraft, and other threats.
For its part, Lockheed Martin Corp. (NYSE: LMT) – PPA’s third-largest holding, with a weight of 6.9% -is well known for making military aircraft. But the firm also supplies combat ships and ground vehicles as well as advanced radar and tactical communications. Lockheed’s reach also includes space exploration, satellite systems, and climate monitoring. Moreover, the company has deep expertise in biometrics, cybersecurity, and even cloud computing.
Then there’s Northrop Grumman – PPA’s seventh-largest holding, with a weight of 5.5% – which has a wide spectrum of operations that cover everything from advanced sensors to missile defense to cybersecurity. The company makes manned and unmanned aircraft for defense applications. And it’s collaborating with Yamaha to develop an autonomous helicopter with onboard intelligence gathering equipment for such civilian uses as search and rescue and forest-fire observations.
Meantime, Northrop provides the military with electronic warfare and infrared countermeasures. In addition, the firm gives us a strong play on a sensor technology, advanced materials, and laser weapons systems.
PPA, of course, passes all three of our ETF Profit Screens…
- Its expense ratio, at 0.64%, is well below 1%.
- It has a five-star rating from Morningstar.
- And thanks to rising budgets – and those additional four triggers – the defense sector is on fire.
This ETF covers every aspect of the U.S. military’s programs, with an emphasis on sophisticated technology. It returned 28.3% in 2017. That’s about 50% better than the S&P 500’s 19.3% gains over the same period
Plus, it’s set to pile up profits for years to come as President Trump ushers in a new era in the U.S. defense program.
And you didn’t have to dodge flying peas while sitting around my dining-room table to learn all this.
Consider that a bonus.
See you later this week.