I think the last time pop culture took any interest in the defense industry, it was in the 1993 movie Falling Down, when disgruntled defense contractor Michael Douglas went on a crime spree in Los Angeles. The defense industry gets nowhere near the attention it got in the days of the "military-industrial complex," but the stocks are putting in new highs daily.
This should be no surprise. The United States have been waging war on and off for the last thirteen years, and if last night's speech was any indication, we are going to be waging war into the foreseeable future. This offends the noninterventionists like myself, but we have a bellicose population and the polls going into the speech showed that most of us were in favor of some kind of military intervention.
I have been looking for an opportunity to short the defense stocks for years. There have been no such opportunities, unless you want to talk about 2008, when these stocks got caught up in the quant meltdown. But the charts have been going from the lower left to the upper right for 14 years, and the last time there was anything resembling a bear market in the defense names was during the tech bubble, when people were preoccupied with other stuff.
The market caps are not grossly inflated, and the valuations are reasonable. Not even the most biased observer would say that these stocks are in a bubble. And I would say that the only threat to these names would be some kind of radical seismic shift in American politics, when Rand Paul or a reasonable facsimile was elected -- but even the libertarian Senator from Kentucky is in favor of military action.
The defense contractors Raytheon (RTN), Northrop Grumman (NOC), and Lockheed Martin (LMT) are not very sexy, but it is very hard for these companies to lose money. The balance sheets are in great shape. The debt levels are minimal. As much as it breaks my heart to say it, as long as the War on Terror continues, it's hard to imagine a scenario where the defense sector underperforms for any length of time.
When I first started looking at these names back in 2008, I thought that a Democratic administration would be far less prone to become entangled in international conflicts. That was very naïve. The Obama administration may have ended hostilities in Iraq (perhaps prematurely), but it is still embroiled in conflict in Afghanistan, and is periodically waging war in various spots around the world, most recently against al-Shabaab in Somalia. There seem to be no limits to our appetite for military intervention.
Our technology has become so advanced that war has become much less deadly (at least for us). I think that fifteen years ago, even the most futuristic among us would have hardly imagined that most attacks would be outsourced to drones flown by operators half a world away in Langley, Virginia. I think we are just starting to learn of the consequences of these actions, but in the short term, the drones have shielded the military from the dangers of ground combat.
I am grudgingly bullish on these stocks. I wish I wasn't, but I think we are going to be dealing with armed conflict for the foreseeable future.