In a shaky stock market environment, there is no better place to turn than the defense contractors. Leading the S&P index by about 20% in 2008 (the 8th straight year of better relative performance), the so-called “big five” have their work cut out for them in 2008 and beyond. It is pretty much a foregone conclusion that defense spending will increase this year.

With high global threat levels, the United States defense budget has historically increased regardless of the presidential party in power. Don’t listen to the fools that tell you a democrat president will cut the defense budget, that is simply not true. The funding put into homeland security as well as our defense budget is set to increase (President Bush recently introduced a $3.1 trillion dollar budget) regardless of the War on Terror’s outcome, and the big five defense firms are set to benefit.

There are pros and cons to each of the main defense contractors, but I want to defend the notion that they are all winners in this environment. Which companies? I am talking about United Technologies, Lockheed Martin, General Dynamics, Raytheon and Northrop-Grumman.

United Technologies (NYSE: UTX)
UTX is the largest of the Defense companies, and offers a favorable mix of risk-reward at this point. A widely expected healthy first quarter could be a huge catalyst for the rest of the year. United Technologies does everything from industrial turbine engines to elevators, and it is this diversity that really makes them the General Electric of defense contractors. The weak dollar actually bolsters a potential earnings beat (+15%) for 2008, despite a rocky economy, because European sales account for about 25% of United Technologies’ total.

Many investors have voiced concern over the recent announcement to acquire Diebold. I believe that speculation since the bid isn’t likely to be hostile and the relative size of the expense is small on UTX’s books. Other potential risks include a weakening in commercial construction markets and a slowing residential construction recovery, but I think that a strong aerospace backlog along with a geographic diversity balances their resume enough to ensure a strong year under even the worst conditions.

Lockheed Martin (NYSE: LMT)
Lockheed Martin is the kind of company that never gives you the value you want, but always performs with off the charts fundamentals and margins. I think a lot of analysts with HOLD ratings on the firm are underestimating LMT’s ability to drive profit out of even the bleakest of market conditions. This company has the most risk behind a 2009 administration changeover, but the threat posed is hyped beyond what will actually happen in my honest opinion.

Truth be told, I’d rather have you in a different defense contractor in the short term, but LMT’s performance is truly remarkable and I still have a BUY on these perennial EPS outperformers. They were up 32.8% during the last 2001 recession, and are poised to outperform the market again in 2008. What’s more, their 10-year annualized return is up at 7.3%. What I am trying to say is, Lockheed Martin is historically one of the top performers in a recession, and this go-round shouldn’t be any different.

General Dynamics (NYSE: GD)
General Dynamics is poised to be the largest holding in the Nittany Lion Fund, LLC., and I am generally stoked about their prospects for the year. GD has a leading market position in the areas essential to the U.S. military and has a strong track record of generating capital under every market condition imaginable.

The new Gulfstream G650 aircraft, from the leading unit of GD Aerospace, has really improved on fuel efficiency and speed (among other things) and I feel like the long-awaited release could really benefit sales. This is pretty much the world to GD, and offers a huge amount of visibility with low risk. Other than this, I continue to recommend General Dynamics because of their “no surprises” business model that continues to perform well, offering beatable 2008 EPS guidance and great long term prospects, that guarantees a safe investment.

Raytheon (NYSE: RTN)
RTN is really a conviction buy in the fact that they have an increasing foreign exposure, above average cash flow and a recession-proof portfolio. A lot of investors have Raytheon as the #1 defense company stock for 2008, and I really can’t argue with them. I do not like the fact that this company is overly tied to the Bush Administration, and would be effected slightly by a reduced US presence in Iraq or a more pro-China President (because of arms supplies to Taiwan). However, you need to consider that the defense budget is relatively stable.

Raytheon is set to benefit from some big contracts in homeland and border security, such as a $5+ billion Saudi middle east border contract and the ability to capitalize on cyber security after acquiring Oakley. Strong foreign orders and redeployment of cash should drive Raytheon into a profitable 2008/2009, and I stand by the hype.

Northrop-Grumman (NYSE: NOC)
All the buzz over Northrop-Grumman has been the contract win over Boeing to supply a new tanker worth a potential $35 billion. Despite Boeing’s dispute, NOC will more than likely come out with the win on this one. Regardless, I feel that the bigger development is Northrop’s “Guardian System,” a missile-jamming “pod” that can be attached to aircraft to prevent them from getting shot down in hostile flight areas. Before this system was released on March 26th, it was widely expected to favor Raytheon and BAE Systems… I think this can be a huge driver for NOC that has really gone unnoticed in the market.

Northrop is a steady performer at an attractive price. With a PEG at 0.88 and a Beta at just 0.38, they seem to be ripe for investment. Not only are the valued well, but they have that low debt that we love (debt/equity is just 0.23). The numbers are good, they are getting contracts nobody thought they would get, and they carry low risk in a poor market environment. NOC is good.

The power behind defense in a down market is the ability to lock in contracts, backed by a rising national defense budget, for the long term. The big five all have their advantages, and I would expect most of them to capitalize regardless of what twists and turns are in store for the rest of the market. Sometimes, the best offense is a good defense!

-The Net Fool

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When you consider a stock in the utilities sector of the market, I’m sure you are thinking about safety and income, not so much about over-sized gains. As a rule of thumb, these big players won’t be outperforming in a bull market… but in today’s uncertainty, why not trust an established utilities contractor with locked-in contracts?

What makes utilities companies so much different from your typical stock is in the way they are regulated. They are essentially allowed to hold monopolies in a free market system, which makes for a big advantage in troubled times. The problem now seems to be with federal interference. The U.S. Energy bill signed back in December of 2007 has really struck a chord with bitter utilities companies, and they sometimes struggle to expand in hard times. Regardless, we like the hedged exposure many have to oil and natural gas markets . Let’s pick up some great utilities stocks!

Electric Utilities - Exelon (NYSE: EXC)
If you are going to own an electrical utility company, I think the one for you is Exelon. Electrical companies like Exelon, despite the recent energy bill, may soon find themselves in the spotlight if legislature restricting carbon emissions progresses further. Most analysts covering the stock will tell you that the firm is undervalued with respects to their potential upside from such a move. I give you a price target of $88.20 versus their current trading under $80, but I think you can grab them closer to $75 .

Other than carbon emission speculation, EXC has a lot more going for them. Commodity prices for coal and gas have improved after increased profitability at nuclear plants. Also, Exelon has seen better than expected capacity prices at its big Chicago plant. These guys really haven’t fallen off the map as their competitors have, down just over 2% on the year (and enjoying a 2.7% dividend yield!).

What exactly does Exelon do? Well for starters, they are known for being the premier provider of nuclear energy in the U.S. People are turning to nuclear technology in order to save themselves from the increasing expenses in gas and coal, and EXC is sitting back with a grin . Bottom line: These guys are too cheap, despite not getting hit this year. Try Exelon for some solid growth in 2008.

Industrial Utilities and Power - PPL Corp. (NYSE: PPL)
Deutsche Bank says PPL is “sitting pretty within the diversified utilites.” Clearly, there is no arguing this case. Catching them around $45 where they are now is a steal on this domestic utilities powerhouse that I set a 12-month target at $60. They have been brought down somewhat unfairly by the broader economy, despite putting out earnings that beat expectations and slightly bumping guidance into the future . I think that people fail to realize that power is generally more resistant to the market than is currently implied.

PPL’s exposure to a tightening power market is definitely a good thing for business. They have systematically generated some risk-adjusted returns for shareholders, and are really taking every expansion, sale and upgrade in the most cautious light as possible.. which has turned out to be a huge advantage. They are working on expanding their nuclear plants (like that in Susquehanna), and have been flying under the radar for too long. You need to keep a keen eye on PPL with constant barrages of political contracts, but its hard to mess with a 2.90% dividend yield, a beta under 0.5, double-digit margin growth and returns above the industry across the board .

Water Utilities - SABESP (NYSE: SBS)
If I had to go one place in 2008 for stock market success, it would be Brazil. So why not take one of the safest plays (utilities stock) in one of the fastest growing markets? Companhia de Saneamento Basico do Estado de Sao Paulo (whew… I’ll just call ‘em SABESP again ) is just the international player we want in a diversified portfolio. SBS is a sewage company. To put it simply, a thriving economy like Brazil is going to leave a lot of sewage behind… and SBS basically has their work cut out for them. It’s really that simple!

These guys are winners. Plain and simple. Down just 0.7% for the year (I consider that a win), they have really been waiting to break back into their classic upswing. SABESP provides water to more than 25 million people in 367 Brazilian cities, and they are DIRT CHEAP compared to their peers. I mean c’mon… a P/E of 0.7 versus an industry 22.66?! Get out of here . If you can bring me a company that is international, undervalued (like nuts), carries a 53.57% gross margin and hasn’t been killed in 2008 as of yet… more power to you. I’m sticking with the utility with the long name, SBS .

Electric and Gas Utilities - MDU Resources Group (NYSE: MDU)
Montana-Dakota Utilities should be a buy on everyones list. They’ve won the hearts of Wall Street investors (10 buys, 1 hold, 0 sells)… now let them win yours! If you are interested in catching some of the Natural Gas & Oil action, MDU has a safe correlation to the commodities. Their operations in Natural Gas & Oil, Electric & Gas, Construction Services and Pipeline & Energy came in higher than expected, with their laggards found in the construction materials & mining segment. I see nat gas & oil alone driving earnings beyond their low-end guidance in 2008, but they could be hurt by residential construction. You should still be buying them, but just with a more cautious eye.

MDU Resources Grp. ended 2007 on a high note, and have taken a hit in 2008. However, they have continued to surpass earnings expectations and I feel that they will recover their losses in the short term and continue to impress in the long term. With a number of key acquisitions that have just been completed, MDU has taken their lumps and is ready to perform. The stock price continues to intrigue me at $25 versus my target set at $33. I think that following the economic stimulus plan, you can expect for lots of money to be thrown at previously unappreciated old-timer public works projects like those found under MDU. They haven’t ignored the strong pull of “green technology,” and really seem ready to break from an unfortunate downtrend. Consider them in your research.

That’s a wrap for the utilities sector. These stocks can add a huge layer of safety to any investment portfolio. While they might not have much in the way of sex-appeal, in a recession… you need some trustworthy under-the-radar successes like EXC, PPL, SBS and MDU. You need to be careful that you don’t catch them in the middle of a legislative disputes (happen somewhat often in the industry), so remember to do your homework.. and invest smart!

-The Net Fool

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If you are looking for extraordinary growth coupled with market-risk levels, you want telecommunication stocks in 2008! The industry as a whole has been one of the strongest performers to date, and it is generally somewhat recession proof (people always want to talk!). Catalysts for the long-term include explosive growth in emerging mobile markets, increasing demand for bandwidth (speed), and a large-scale shift from copper wiring to fiber and broadband wireless. The bulls are out, lets grab some value.

Telecom Services - AT&T (NYSE: T)
Wireless momentum continues to power the market in 2008, and AT&T is right there leading the pack with over 65 million subscribers in the United States. They met expectations in their forth-quarter earnings call (that’s the 11th straight quarter of double-digit growth in earnings), but the really important news here is that wireless results were above expectations and guidance for 2008 was reaffirmed. I think AT&T has what it takes to lead the market into the mobile age of technology. Already, we have seen 57.5% year-over-year growth in wireless data revenues, driven by this increasing adoption of smart phones and 3G wireless devices. Essentially, computers are becoming smaller, and I think that these iPhones and Blackberrys are simply early models of the personal computers of the future.

What’s wrong with Verizon (NYSE: VZ)? I really can’t say, as it is a bit of a crap shoot at this point. I’d have to give the edge to AT&T because of their proven ability to grow earnings despite being so large, and their willingness to open networks toward new computing technology. What really pushes T over the edge for me is its steady 4.5% dividend yield, earnings visibility, growing wireless business, favorable balance sheet, long-term strategy and strategic acquisitions (successful acquisition of BellSouth in 2007). You can look toward their IP-services and whatnot… but you want AT&T for their superior wireless dominance in 2008.

Telecom Services - Millicom (NYSE: MICC)
Once again, Millicom blew away expectations by producing an amazing 3.4 million net subscribers and 41% revenue growth in the forth quarter alone. This company is on cloud nine right now, and while margins were slightly below expectations… guess what… they were 40.0%. Essentially, what Millicom is doing is bringing wireless technology to places that are underdeveloped. They charge by the second, rather than minute, to increase their value to thrifty subscribers and are very active in emerging markets. I am confident in their growth, and Millicom is my Telecom stock for 2008.

MICC is going to kick off 1Q08 with a bang due to their 4Q recorded net-add increase. Broken down by region: Central America growth should drive from new 3G technology and higher-quality customers, African markets have seen dramatic margin increases with new subscribers, Columbia has been negatively impacted by connection fees but should rebound nicely and Asian market investments should continue to propel strength in this key market. MICC is impressive across the board, and their huge international exposure should prove beneficial in 2008.

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You’ve heard pitches on Apple (NYSE: AAPL) and Corning (NYSE: GLW), now lets continue on with the information technology sector. There are many places to invest around the sector. I am finding increasingly that the big boys like IBM, Microsoft & Google are providing more risk than reward. As investors, we want as high upside potential as possible when matched with low downside risk. Lets find some companies that match our description.

Solar Semiconductor - The Net Fool picks First Solar (NYSE: FSLR)
After doubting the extreme-growth behind solar technology in January 2008, it seems high time we apologized to powerhouse gainers like First Solar. ThinkEquity Partners gave this great stock a one-word classification, “debottlenecking.” After smashing earnings estimates of 53 cents a share with an astonishing 77 cent gain, they appreciated 30% on the day after increasing 2008 guidance. Don’t let this buy-athon scare you away. We thought the solar industry run-up was finished, and were clearly proven wrong. The year-over-year revenue growth of 280% and strength in EPS suggests stronger future earnings power.

Operating efficiency is one of the primary benefits I see from operation in 2008. Costs per watt ($1.12) averages were down 6% on the year, and a negative currency impact from the Euro was almost entirely overshadowed by economical operations in First Solar’s Malaysia plant. Spots for improvement have been identified, and most analysts feel they can bring home the gold. Most notably, the first and second quarter 2008 should prove to show continued growth on track with 2007 appreciation. Solar companies are all trading at attractive premiums when considering growth. With oil on the move upward, it seems that momentum for green energy will remain strong. Investors should return to the solar arena with strong earnings and demand in mind.

The Malaysian plant’s revamp may have a negative impact on First Solar’s first quarter earnings in 2008. On the other side of the coin, we expect an increase in production and see operating margins supporting at 30%+ levels. I wouldn’t be surprised at all to see more good news in guidance. We expect their PE and PEG ratios to come more in line with the industry, as the current premium they appear to be trading at is a result of explosive growth over the past year. Execution was flawless in 2007, and with nothing but green lights thus far… First Solar makes for a great long-term growth play.

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Despite recent turmoil in the IT sector for 2008, I contend that this is now where you want to be. Reasoning here follows that the financial sector is struggling to keep its bad news buried, the housing market is shambles and even retailers are struggling to sustain growth. A move toward tech seems fully logical due to typically strong international exposure, confident balance sheets and the fact that IT stocks hold a historically low correlation to the broader markets. Lets pick some technology bulls.

Consumer Electronics - The Net Fool picks Apple (NYSE: AAPL)
Hey Mr. Market, why so down on Apple? The iPod business is fully matured. The iPhone is losing inventory to similar devices. MacWorld was missing its usual superstar prospect. I tell you what, take this news and know that Apple has historically done its best when sentiment is low. Steve Jobs & Co. is my favorite IT pick for 2008. The downside has opened up value in the stock, and I feel they have bottomed!

Looking further into the concerning issues. The iPhone was selling less because of Apple’s push into the new iPod Touch, the analysts at Needham noted that “Apple would have sold close to four million iPhones in its absence.” Add this to the fact that an estimated 25%-30% of iPhones were “unlocked” from AT&T, a number that actually benefits AAPL through the carrier’s headache. While iPod sales were slowed, I feel that the mp3 device is merely in a transitioning phase, and interesting opportunities are now raised in mobile technology.

I feel that AAPL may be a recession resistor. Mac business is healthier than ever, and single-handily offset losses in iPods. Investors are punishing high-end firms like Apple for any disappointments. The stock is 35% off its highs, trading at a premium 24-times-earnings compared to its peer’s 32x and has a PEG of 0.7x. They’ve got the free cash flow we love ($6.78/share est. 2008) and its business segments have never looked healthier. People are hating on this company for no reason. As Warren Buffet puts it: “Be fearful when others are greedy, and greedy only when others are fearful.”

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