In the markets, economy and even society itself, we see fads come and go. New technologies popup and are almost immediately are replaced by superior products. We have seen industries born, mature and eventually die off. Things like buggy whips and VCRs have come, dominated and disappeared.
This cycle of birth and death has been with us for all of recorded history — as have the fads that have short, wildly popular heydays and the disappear as quick as they appeared. Very few things stand the ultimate test of time.
Unfortunately, there is one thing that has stood the test of all recorded history and that is war. Since the first pack of hunters decided it would be easier to pick rocks and sticks and steal their neighbors’ mastodon carcass, people have been in a state of war somewhere on the planet. Each generation develops new ways of getting their troops into position to kill their enemy quicker than the last.
Today is no different. The militaries of the world are always looking for new technologies to market their armies more mobile, more sophisticated and more advanced than their potential enemies.
The wars of the future are going to be decidedly high-tech affairs. Cyber warfare robotics and drones will be a bigger part of military techniques, and therefore a larger part of military spending in the years ahead. As unfortunate as war is, it’s unlikely to disappear anytime soon, and smart investors can benefit by owning shares of those companies that get smarter, high tech troops into the field quickly and efficiently.
Kratos Defense and Security Systems (KTOS)
Kratos Defense and Security Systems (KTOS) is my favorite defense stock right now. I have owned it for about a year now and anticipate owning it for a long time and buying more if the price declines.
The company is in the growth sectors of defense spending, providing cyber warfare systems and solutions, drone technology and components and security systems for critical infrastructure systems and government installations. For the most part, these segments of military spending aren’t going to feel much pain for defense spending cutbacks and should grow at a decent rate for a long time.
As bonus, Kratos just announced that it will be selling its electronics products division while also “reducing the total taxable gain of the transaction to Kratos.”
Insiders like their prospects, consistently buying KTOS stock in recent months. Kratos Defense and Security is going to enjoy a very long period of sustained growth as the military increases spending in its major focus areas. Unless a larger company steps in and pays a large premium to buy the whole company. Either outcome would be a huge win for current investors.
CPI Aerostructures (CVU)
CPI Aerostructures (CVU) is a manufacturer of structural products for aircraft. While the company is working to increase the amount of business it does with commercial aircraft companies, CPI is still heavily involved in military projects, including drones.
CPI currently has contracts to provide assemblies for the Navy’s latest battle management command and control aircraft, the E-DR Hawkeye, and the Carrier Onboard Delivery 2-Ca Greyhound fixed wing aircraft. The company is also supplying parts for both the UH-60 Blackhawk and A12 Zulu military helicopters.
CPI also makes airborne Intelligence Surveillance and Reconnaissance pod systems that are used for aerial surveillance by all branches of military aircraft. It should see plenty of business for wing structures and surveillance equipment used in the fast-growing drone fleet being developed by the U.S. military.
The Bottom Line
War and armed conflict are going to be a fact of life as long as people form groups, tribes, nations and states that may disagree with each other. Companies that provide the tools needed to wage war more efficiently and fiercely will proper for generations still to come. It just makes sense to have them in your long-term portfolio.
As of this writing, Tim Melvin was long KTOS and CVU. He is the author of the Banking on Profits newsletter covering the community bank stock opportunity and the Deep Value Report that seeks out undervalued stocks that are likely to survive until they thrive and capture the value effect that has been proven to beat the market over time.
