February 19, 2012 in Business

Motley Fool: Pentagon’s new focus good news for defense industry

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The Pentagon recently began cutting billions of dollars from its 2013 budget. Planned cuts range from delaying orders for a new aircraft carrier from Huntington Ingalls, to shrinking the Army by an additional 30,000 soldiers, to slowing down the rate of purchase of Lockheed Martin’s new F-35 stealth fighter jet.

How will America do more with less? In part, by shifting from high-cost manned weapons to lower-cost robotic ones? The U.S. Marine Corps plans to weaponize more Textron Shadow unmanned aerial vehicles (UAVs). Historically, the Shadow has been unarmed, used primarily for observation. When it saw a bad guy it would call for a more robust ally to bomb it. The Marines now want to cut out the middleman and turn the Shadow into a “shooter” in its own right. But at just 11 feet long with a 14-foot wingspan, the Shadow is far too small to carry most conventional munitions. The solution: Build smaller bombs.

The Pentagon has already tasked Alliant Techsystems and Raytheon with developing miniature guided bombs (25 pounds or less). The Marines are testing a different munition. If these work and small UAVs such as the Shadow can operate as armed drones, this should result in new sales opportunities for the major defense weapons makers – and savings for U.S. taxpayers. (The Motley Fool owns shares of Lockheed Martin, Textron and Raytheon.)

Ask the Fool

Q: Is it smart to buy more shares of a stock when its price has fallen? – L.E., Watertown, S.D.

A: This is called “averaging down.” It’s often regrettable because there’s frequently a good reason why a stock is dropping.

There are some exceptions to this rule, though. For example, perhaps the entire market has swooned, taking your holding with it. Or maybe the market seems to have significantly overreacted to your company’s latest news, sending its shares down sharply. If so, you can snap up some bargain-priced shares.

In 2007, I worked in the gypsum industry and knew that USG was a great company. I saw that the price had dropped, and Warren Buffett was buying shares. So I bought at $49, figuring that when housing recovered, USG would soar. Well, I’m still waiting and it’s now down near $13. Maybe housing will recover sometime in my lifetime, maybe not. – George, online

The Fool responds: Sometimes we must wait a long time for depressed stock prices to get back to more reasonable levels. The beleaguered housing industry has kept many companies down, and it may still be a while before it really heats up again. There have been some promising signs, though. The homebuilding company Lennar recently reported a 20 percent jump in orders – which boosted USG’s stock price by 10 percent, as investors anticipated growing sales of drywall. The protracted sluggishness of USG stock is a great reminder of why we should only invest long-term money in stocks. In the short term, anything can happen. We should focus on where we expect a stock to be many years from now.

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