Is It Time to Invest in Aerospace / Defense ETFs Like It's 2003?

Six years ago, our country debated whether we would/should fight Iraq. We already had troops fighting to maintain control of Afghanistan.

I remember thinking that history favored defense stocks in similar situations. In fact, stock indexes always bounced roughly 10 percentage points higher upon confirmation of U.S. military conflict... regardless of the outcome of that conflict (i.e., win, lose or draw).

I remembered a few other historical precedents as well. There hadn't been more than 3 straight down years across all major indexes, though the Dow had its 1929-1932 streak. Indeed, 2000, 2001, 2002 seemed to be setting the stage for some sort of revival in 2003. What's more, historical P/Es for the defense/aerospace sector typically ran at around 17-18.

So the U.S found itself in early 2003, endeavoring to persuade the world that Iraq needed to be stopped from its pursuit of WMDs. And there I was, evaluating the investing potential of the defense/aerospace segment:

1. P/Es at the start of 2003 were approximating 11, a sign of a huge bargain for defense/aerospace.
2. The ongoing battles in Afghanistan and the likely determination by the Bush Administration to initiate "Gulf War 2.0" meant more business for the sector at large.

As it turns out, the day that the U.S., Britain and Spain jointly announced intentions to engage Iraq in combat, March 11, 2003, the markets officially began a bullish uptrend. Moreover, the Fidelity Select Defense and Aerospace Fund (FSDAX) not only bounced 10% higher off those March lows, it climbed above its 50-day moving average in April and above its 200-day near the start of May.

What are the similarities to 2009? Like 2003:

• Signs of economic recovery have been presenting themselves

• The sector valuations are as attractive as they've ever been on extraordinarily healthy balance sheets
• Iran, North Korea and Afganhistan, require military considerations
• Aerospace tends to get a jolt from high tech, and can help the downs and ups of defense contractors that rely on government decisions
• Both the iShares Aerospace Defense Fund (ITA) and the PowerShares Aerospace Defense Fund (PPA) are in long-term technical uptrends

Of course, the Obama Administration does have to make some tough decisions on spending cuts. And plenty of folks feel this may mean trouble for the defense sector. Maintain stop-losses if you venture into this area.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.