Dear Subscriber,

Sean’s up in Labrador checking out a uranium company. In a moment, I’ll show you an e-mail he just sent me from the field. But first, he wanted me to give you an update on an area that I follow closely: Defense stocks.

My name is John Burke. As the Money and Markets analyst tasked with tracking global conflicts and the defense industry, I’m constantly reminded how different the world was twenty years ago when I was serving as an intelligence specialist in the United States Marine Corps.

I trained in mountain and desert warfare in California. I learned jungle fighting techniques in Panama. I protected U.S. Embassies in Guatemala, Czechoslovakia and Finland. But throughout it all, the Soviet Union was the foe that got the most attention.

How times change! After the fall of the Soviet Union, the U.S. was in the ring without an opponent ... until the attacks of September 11 thrust Al-Qaeda and international terrorism into the spot of public enemy number one.

This doesn’t make me happy. But geopolitical conflicts and rich defense budgets have been good for defense stocks. Just look at how well the large-cap heavy hitters have been doing so far this year:

• Lockheed Martin (NYSE: LMT) has soared 33%.

• General Dynamics (NYSE: GD) gained 19%.

• Raytheon (NYSE: RTN) has risen 17%.

Those are the names that everyone knows. Plus there are also plenty of mid-cap companies that supply these behemoths with products and services. Whichever you choose, the industry’s fundamentals couldn’t look much better than they do right now …

Demand for U.S.-Made
Defense Products Soaring

With all that’s going on in the world, a lot of foreign governments are bulking up their militaries. And guess who they turn to the most when they need the latest equipment: U.S. companies.

Of course, with some exceptions, they have to ask the Department of Defense for permission first.

For all of last year, foreign governments proposed $7.2 billion in purchases. Just through the end of July, they’ve proposed $20 billion! That’s an increase of 177% and the year is nowhere near over.

Demand is surging, and the best example is Saudi Arabia. In July, the Saudis requested to spend up to $9.7 billion on Abrams tanks, Blackhawk and Apache helicopters, and a variety of other equipment for the modernization of their national guard forces.

Why the shopping spree? Saudi Arabia is worried about Iran’s growing influence on the Middle East. But they’re not the only ones. Here are a few recent proposed arms sales from other countries:

Pakistan: $3 billion for 36 F-16 aircraft and equipment. Primary contractors — BAE Advanced Systems., Boeing Corp., Raytheon, Lockheed Martin, Northrop Grumman, Pratt & Whitney, United Technologies Co., General Electric.

United Arab Emirates: $808 million for 26 UH-60M Black Hawk Helicopters, engines, and equipment. Primary contractors — Sikorsky Aircraft Corp. and General Electric.

Bahrain: $252 million for 9 UH-60M Black Hawk helicopters, engines, and equipment. Primary contractors — Sikorsky Aircraft Corp. and General Electric.

I could go on and on, but you get the idea. Of course, demand from foreign governments is just one part of the picture. Back home …

U.S. National Defense Outlays
Are Up 82% Since 2000

In 2000, the U.S. spent $294 billion on national defense. This year, the government will spend an estimated $535 billion. That’s 4.1% of our gross domestic product and nearly 20% of the total budget.

The most important thing: Spending has not only risen, but should continue to rise. Since 2003, the average monthly costs for military operations and investment spending in Iraq, Afghanistan, and the global war on terror have risen substantially.

According to the Congressional Research Service, Iraq costs have risen 80% to $8 billion while the costs for Operation Enduring Freedom in Afghanistan are up 20% to $1.5 billion.

Bottom line: Defense companies have strong winds behind their sails.

If you want to get a stake in a bunch of the biggest defense companies all in one shot, consider a defense-industry ETF like the PowerShares Aerospace & Defense fund (NYSE: PPA).

Or, if you want to learn more about some smaller-cap companies that I like, check out my report, The Rising Tide of War: Five Defense Stocks Set to Soar.

Meanwhile, the same global tensions that are driving defense stocks are also pushing up the value of scarce resources and the companies that mine them ... which is why Sean is up in Canada right now.

Here’s his e-mail.

On the Uranium
Trail in Labrador

Hi Johnny B.,

A helicopter ride is probably old hat to a former Marine like you, but this was only the second one in my life. Man, those things are fun!

My pilot, Paul, picked me up at the Goose Bay airport. Then we went to an airbase on the other side of town. It used to host pilots from all over the world, who took advantage of the secluded location to practice low-flying tactics. But now that it’s easier and cheaper to send drones, the base is eerily quiet, with some buildings falling into disrepair. It’s a good place to keep a helicopter, though.

We took off and headed northeast. Labrador is mostly wilderness: Trees, rocks, ponds, lakes, and more trees. From the air, we saw huge scars on the landscape from a forest fire of more than a decade ago. This place may be wild, but that doesn’t mean it grows back quickly.

There are a bunch of mineral explorers scattered across the province — gold, copper, nickel, you name it. We passed over a few of their camps along the way. We also flew over traces of the last uranium boom in Labrador — back in the ’70s, before the price of uranium crashed. I saw roads to nowhere that are nothing but snowmobile trails today.

After some breathtaking cliffs and saltwater lakes, we finally ended up at a former fishing village where the company I’m investigating makes its field headquarters. But the actual mining camp is another helicopter ride away … we’ll be leaving soon.

The air is so crisp and fresh here. I like to remind myself that this is one reason why uranium is going to get so popular — people don’t like choking on coal dust.

You’re probably wondering about the company I’m here to investigate. So far, the story is very interesting. They’re sitting on what they estimate to be 40 million pounds of uranium, but they hope to have an 80-million-pound resource defined by the end of the year.

Shall we do the math? $48 per pound times 80 million pounds is $3.8 billion dollars. Meanwhile, the stock’s market cap is less than $550 million. That’s right — you can buy its resources for less than 15 cents on the dollar.

Could something go wrong? Sure. That’s why I’m checking it out in person. I’ll have the full scoop when I get back.

Until then, you guys take care with that storm coming. If you have time, would you give my wife a call and see if she needs help with the shutters? Thanks, bud!

See ya later,

Sean

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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.

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