I am retired and take educated guesses on all things financial.

February 13, 2008

February 15, 2008: PowerShares Aerospace and Defense Portfolio Ammunition for Profits

No war for oil!! Marines out of Berkeley!! Out of Iraq Now!! state the daily pounding of headlines from our unbiased mainstream media. A recent favorite of mine is "John McCain is a true American hero...BUT".

After a reasoned glance at the upcoming defense appropriations, add-ons by the Legislative Branch to President Bush's Defense Budget and a realistic assessment of our foreign enemies and in-the-pipeline countermeasures against their real threats to our national interests, I believe that strong consideration for an overweight position in defense and aerospace stocks deserve consideration. There are more than a few funds to game this sector. I like PowerShares' entry, PPA.

The PowerShares Aerospace and Defense Portfolio ETF utilizes the respected SPADE Defensive Index, which is designed to identify successful, forward-looking companies involved in the manufacture, development, operations and support of our defense, homeland security and aerospace operations. PPA is rebalanced quarterly and reconstituted annually, which is acceptable for this sector where systems may take years to come to production and where contracts are awarded over the course of several years (especially in the maintenance and support areas).

Since inception in October of 2005, the fund has grown in assets to $284.1m.PPA volume approaches 136,000 shares per day. Trading at $21.03 within a 52-week range of $16.00-$24.30 and an expense ratio of .60%, the fund has often bested peers in total return.

Reviewing the holdings within the portfolio, 79.06% are industrial, 15.94% information technology and 3.15% consumer discretionary (all of it in Garmin).
Top stocks include Lockheed Martin (LMT), Boeing (BA), United Technologies (UTX), Honeywell (HON), Raytheon (RTN), Northrup Grumman (NOC),L-3 Communications (LLL), ITT (ITT), Rockwell Collins (COL), Precision Castparts (PCP), Textron (TXT) and Goodrich (GR). Significant holdings also include Computer Services (CSC), SAIC (SAI) and Harris (HRS). What is most impressive about the total portfolio is the inclusive nature of defense companies that are essential towards developing countermeasures for more sophisticated enemies such as China and the Russian Federation - especially in space, as well as the War on Terror which, like it or not, will be waged for quite some time in a variety of ways and locations. Homeland Security companies are also well-represented in this portfolio, including those involved in the United States Coast Guard Deepwater program, which is a huge undertaking.

The security of our country trumps other sectors that are impacted by political oneupmanship and voter pandering. While there is and always has been waste and overlap in this sector, this is no doubt that essential defense of our country and national interests is imperative. While one may debate the peripherals of foreign policy or where stands by the military are ordered by the political party in power, almost all of us agree that the military needs to be well equipped, well-trained and prepared to fight and protect us. Having three children , a son-in-law and a daughter-in-law serving as military officers, I can attest that going into battle with less than state of the art equipment is unnaceptable - and lethal for our service personnel.

I think that some individual stocks will do extraordinarily well in this sector, but the individual investor would do well to buy PPA with the SPADE Defense Index dictating its contents. Perhaps the next round of selling in this turbulent market would be an ideal entry point.

DISCLOSURE: The author does not hold PPA. He does hold stocks in the SPADE Index.