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Defense stocks are in the red today following President Obama's speech to announce a broad based plan to reduce the deficit by $4 trillion over 12 years or less. Among other things, the plan includes tax increases and cuts in military and Medicare spending. The president's greater-than-expected deficit reduction plan may have sparked a mild sell-off in defense sector companies. Goldman Sachs (NYSE:GS) analyst Noah Poponak wrote, "declines in base investment in 2011 outcome represent an outcome worse than we expected when we first downgraded the Defense sector."

HIGH EXPOSURE TO GOVERNMENT SPENDING
While stock weakness may be warranted, investors should understand that not all defense companies are created equally. Based on the 2010 revenues, here are the companies with the highest exposure to government spending. We have also include the percentage of their total sales attributable to government spending:

  • General Dynamic (NYSE:GD): 72%
  • L-3 Communcations (NYSE:LLL) 83%
  • Lockheed Martin (NYSE:LMT) 84%
  • Northrop Gruman (NYSE:NOC): 92%
  • Raytheon (NYSE:RTN): 88%

LIMITED EXPOSURE TO GOVERNMENT SPENDING
Investors interested in defense related stocks with modest exposure to government spending should look at the following stocks. We have included the percentage of total sales attributable to government spending:

  • Boeing Co (NYSE:BA): 43%
  • United Technologies (NYSE:UTX): 18%


GOING FORWARD
Investors looking at Defense sector names should make sure that the baby does not get thrown out with the bath water. While all of the companies mentioned in this article get a large portion of revenues from the government, there are still meaningful company specific variances between idiosyncratic sensitivity to government spending.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UTX over the next 72 hours.

Source: Defense Sector Under Attack: Sift Through These 7 Stocks