Defense Sector Continues to Run

by: Scott Sacknoff

While much of the market lurches back and forth as it evaluates the loan/credit crunch, declines in the housing market, and the possibility of a recession, one sector continues to shine – aerospace, defense and security.

This is not to say the sector has not responded in sympathy to market declines or volatility, in fact, the Powershares Aerospace & Defense ETF (AMEX: PPA) saw 2-3x its normal trading volume in August, surpassing 7 million shares traded for the month.

With spending on defense and homeland security driven primarily by the U.S. government budget, a multi-year process that is relatively independent of recession, credit worries, and other international investment issues.

Overall, the Powershares Aerospace & Defense ETF has seen its AUM triple in 2007 as its underlying SPADE Defense Index has gained nearly 20%. This is a run that has seen the sector beat the S&P 500 for 8 consecutive years, 6 of which produced an alpha of 10% or more. The sector has achieved 19% gains or better in 4 of the last 5 years.

When it comes to the individual companies operating in the sector, after major gains by the Big 5 in prior years, this year's gains have been more moderate -- Boeing (NYSE:BA) (8.85%) Lockheed Martin (NYSE:LMT) (7.68%), General Dynamics (NYSE:GD) (5.66%), Northrop Grumman (NYSE:NOC) (16.45%), and Raytheon (NYSE:RTN) (16.17%).

Top gainers in the aerospace, defense, and homeland security sector for 2007 include TASER (88.04%) who has eliminated many its legal issues and rebounded in the market. Garmin, whose GPS products rely on the Department of Defense satellite network, was up 82.95% as the commercial uses expand. Cubic (NYSE:CUB) (82.17%), EDO) (81.30%) and aircraft component manufacturer Precision Castparts (NYSE:PCP) (66.47%) round out the top 5. August may have also seen the end to the bottom in the defense information technology market, which has lagged the rest of the sector as the Pentagon shifted resources to Iraq. August's top gainers included CACI (NYSE:CAI) (up 14.81%), SRA (SRA) (18.43%) and Stanley (NYSE:SXE) (up 21.55%).

When comparing defense to other sectors, using the Lipper statistics for the 5-year total return of mutual funds, defense ranks only behind Latin America, Emerging Markets, China, Natural Resources, Gold and Telecom.