Most investors have heard the argument for defense stocks on countless occasions. The basic pitch goes something like this: if there's one consumer that never stops spending, even in the weakest economies, it's Uncle Sam. And defense remains a key destination for much government spending; therefore, companies that sell defense products and services to the government are sure-fire winners.
 

There is truth to this argument. After all, as you can see in our chart, U.S. government spending has been rising steadily for years. And in most cases, spending growth has outpaced key inflation gauges such as the consumer price index (CPI). The numbers highlighted on this chart are real, inflation-adjusted figures. And as you can see, the size of the budget has grown through good economies and bad, and through both Republican and Democratic administrations.

But even as total spending increases, individual government contracts can and do get cancelled and delayed. And when that happens, firms with exposure or reliance on those programs can get hit. For example, in the early 1990s, the A-12 Avenger II Stealth aircraft was a major new aircraft project for the U.S. Navy. Dick Cheney, then the Secretary of Defense, decided to cancel the Navy's orders for the $165 million planes in 1991. The developers of the plane, including McDonnell Douglas, got hit on the news.

Security over Defense
Despite these periodic hiccups, the basic argument for investing in stocks levered to continued government spending holds water. And there are areas of the Federal budget less exposed to budget cuts than high-profile, expensive weapons systems.

Since the devastating terrorist attacks of September 11, 2001, spending on national security and safety has ballooned. The list of projects includes upgrades to security systems at airports, more advanced scanning equipment for vehicles crossing U.S. borders, and even sophisticated equipment for identifying and recognizing facial features of known terrorist suspects in crowds. Security spending has also involved buying equipment for so-called first responders — firefighters, police officers and emergency medical personnel.

Much of this security spending is no longer part of the budget for the Department of Defense (DOD), but is instead budgeted for the Department of Homeland Security (DHS), a relatively new department created after September 11th. Our chart shows Federal outlays for the DHS going back to 1995 and projected out to 2009. The figures prior to the creation of DHS are estimated based on security-related spending by the DOD. Large-scale defense programs can

Important Note:  In the remainder of this article, Market Advisor editor Paul Tracy provides two in depth profiles of two of his favorite security and defense contractors, both of which are expected to profit immensely from the expanding U.S. budget and achieve at least +20% earnings growth for the next 5 years. However, in order to view the remainder of this article, you'll need to subscribe to our premium newsletter — Market Advisor. After you subscribe, you'll receive immediate access to this full article, as well as our monthly Market Advisor newsletter and a host of additional premium content. Please visit one of the following links to continue.