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Defense Stocks that Protect and Serve

Being married to a police officer, I am always worried about the safety of those who protect and serve. The day I don’t have to worry about my husband getting hurt while on patrol is the day I’ll finally be able to breathe easy. So you can imagine my fascination with drones when I first came across them. A technology that allows soldiers to fight for their country without being in harm’s way? Now if that’s not a game-changing tech, then I don’t know what is.

A Special Message
From Hilary

Did you see this newswire headline? According to Bloomberg, individual investors who fled the markets and hunkered down in cash missed out on an estimated $200 billion in lost profits since March 2009.

As a Kramer Capital reader, you're no “ordinary” investor. But these are no ordinary times. None of us are immune from fear and anxiety — not even me! I’m working on a solution I think you're going to like. Before I tell you what I have in mind, I wonder if you could take a moment and help me out with something.

If you don't mind, can you drop me a quick email and tell me this...

Did last year's rally catch you off guard? If it did, are you at all concerned that it's too late to commit new money as the stock market hits new highs — and risk “getting in at the top?”

Or if you didn't miss the rally and are sitting on some hefty gains, are you at all anxious about letting your profits “ride” into 2013 — especially given the age of the bull market, the global economic uncertainty, and the erratic behavior in Washington?

Of course, there is no right or wrong answer. But your reply will be extremely helpful in shaping my thinking. I’ll also tell you what I can about my unusual new project — including why it has me more excited than I've been since I started on Wall Street over 25 years ago.

I'd really love to hear your thoughts: Are you at all anxious about going “all in” or letting your profits “ride” in this market? And if so, why? Please take a moment to email me and let me know how you're feeling. I promise to read your note and will be back in touch soon.

Drones are a massive new industry with almost limitless potential that is only in its infancy. Just last week, Time magazine put them in the spotlight with their featured cover story, “The Rise of the Drones.” You probably already know about the role drones are playing the war on terror (including helping to pinpoint Osama Bin Laden's location before the Navy Seals were sent in), but President Obama has since increased the use of them. Time found that the U.S. military carried out 447 drone attacks in Afghanistan in the first 11 months of 2012.

But what’s truly amazing about drones are their vast capabilities, even outside of combat. We're talking everything from dusting crops and finding lost people or criminals, to monitoring traffic, wildlife, and disasters like oil spills. The possibilities are endless. With President Obama signing into law the FAA Air Transportation Modernization and Safety Improvement Act of 2012, unmanned aerial vehicles (UAV’s) will be high in demand. Buried in that law is a provision no one is talking about: It requires the FAA to open U.S. airspace to UAV’s by 2015. The FAA predicts this new law will pave the way for a whopping 30,000 unmanned drones to fly over the U.S. in the next seven years! And that's just for commercial use.

Now, UAV’s aren’t the only ones beefing up a changing defense sector. Cyber warfare is a silent battle that rages every minute of every day, and is quietly becoming a serious threat. Last year alone, there were nearly 200 cyber attacks against the control systems of our critical infrastructure facilities, including power plants, refineries, transportation systems and water treatment facilities. That was a nearly five-fold increase from the number of attacks carried out in 2010.

You can imagine the kind of money governments and companies around the globe are spending in a frantic race to ward off an explosion of cyber attacks. The U.S. government has spent over $600 billion on information technology over the last decade, and a huge—and rapidly expanding—portion of that money is being dedicated to cyber defense. U.S. corporations currently spend over $5 billion dollars on cyber security, and that amount is sure to increase. Throw in spending by foreign corporations and governments, and all told, the global cyber security market will be one of the fast-growing markets on the planet, projected to reach $80 billion in the next five years.

The defense sector certainly isn’t what it used to be, as the industry and technology changes the opportunities for those who work to protect us and also for investors. If you’re looking to take advantage of these rapidly-growing segments, here are three defense stocks that I really like right now.

  1. AeroVironment (AVAV) is a great play on the UAV sector, as it is one of the leaders in unmanned aircraft systems. The company has a storied history of game-changing innovation going back to its founder, Dr. Paul MacCready. He started AeroVironment in 1971 and gained fame six years later when his “Gossamer Condor” became the first human-powered aircraft to complete a sustained, controlled flight. They have three models that are flying high: the Raven B, Wasp and Puma AE. With the company dominating the sector and the Pentagon’s increasing need for UAV’s, this stock is going to continue to profit.
  2. Check Point Software (CHKP) develops technologies to secure communications and transactions over the Internet by businesses and consumers. The company has a range of software, as well as combined hardware and software products and services for information technology (IT) security. Check Point is probably best known for its firewall and virtual private network products, but firewalls can't stop every threat, and CHKP has developed a comprehensive solution to attacks known as unified threat management (UTM).
  3. Sourcefire (FIRE) develops “intrusion detection” hardware, software and cloud-based network-security products and services for businesses and government agencies. These products and services are to help customers before, during and after an attack. FIRE has a virtual arsenal of advanced technologies designed to thwart malware attacks. The company has developed a cutting-edge technology that uses cloud-based computing systems to look across millions of computing machines simultaneously to detect malware attacks in real time. They also offer “sandbox” technology to verify untested code or programs and assess their legitimacy, and FIRE recently introduced a next-generation firewall that enables them to lock down channels that malware moves around on.  In 2012, Sourcefire was named the 11th fastest-growing tech company in America by Forbes magazine. This is a company to watch out for.
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