Wednesday, May 02, 2007

Defense Investors, Pay Heed

Investing in the defense business these days is a musical-chairs situation. Both military budgets and stock valuations in the defense and aerospace sector look historically high. When will the music stop?

We can't answer that question, but we can offer up individuals likely to make the right calls in this tricky environment: the defense and aerospace analysts winning awards in our annual analyst survey, published this week on

Our ranking, prepared for us by research firm StarMine, assesses analysts in two areas: the outcomes of their 2006 stock recommendations (buy, hold, sell) and the accuracy of their earnings forecasts for the four quarters through March. For more on the methodology, click here.

In terms of stock recommendations, these three folks won top spots among defense and aerospace analysts: J.B. Groh of D.A. Davidson & Co., Troy Lahr of Stifel Nicolaus and Heidi Wood of Morgan Stanley. J.B. Groh is a repeat winner, climbing up to first place from his No. 3 ranking last year.

Of those three, Troy Lahr is geographically closest to Washington, D.C. Stifel Nicolaus, part of Stifel Financial, is headquartered in St. Louis but has a big presence in Baltimore, thanks to its 2005 acquisition of Legg Mason's brokerage business. Lahr, who came to Stifel via Legg Mason, says the robust defense industry presence in Maryland was one factor in his becoming a defense analyst six years ago.

These days, Lahr's wary of prospects for big military contractors such as Lockheed Martin and Northrop Grumman. Defense budgets, he expects, will increase in the 5% to 7% range in the next year or two. "Beyond that, it's probably going to start slowing down" he says. "A lot of these companies are really at peak valuations relative to the growth outlook."

Full story at