Thursday, January 10, 2013

Investing in Unmanned Naval Systems

The market for unmanned naval systems is growing by leaps and bounds.  Between air, surface, and subsurface platforms, a variety of companies big and small are competing for contracts to meet the demand of navies across the globe.  To provide some perspective on this market, NavalDrones has analyzed the performance of a theoretical portfolio of 12 publically-traded stocks during 2012.  These stocks range from well-entrenched defense giants like Lockheed Martin(LMT) and Boeing(BA) to mid-sized companies producing sensors and other components for naval drones including Griffon (GFF) and Cubic (CUB).  With $1,000 invested equally in each of the stocks at the beginning of 2012, the portfolio's initial investment of $12,000 would have been valued at $13,196.12 at the market's close on December 31, for a total return (inclusive of dividends) of 9.97%.  In comparison with our portfolio, the S&P 500 Index (SPY) returned 15.84% last year and the iShares Dow Jones U.S. Aerospace & Defense Fund (ITA) returned 13.87%.

Although the portfolio as a whole delivered underwhelming results, there were some stand-outs.  The group's best performing stock was BAE Systems (BA.L), which returned a solid 25.7% last year.  BAE's diversified products include the Expendable Mine Neutralization System (EMNS) being installed on older MCM ships and the Advanced Precision Kill Weapons System (APKWS), which will be tested aboard the MQ-8B Fire Scout later this year. The portfolio laggards were AeroVironment (AVAV), maker of small tactical UAS such as the RQ-20A Puma, which plummeted 28.4% and SAIC (SAI), with a 7.4 loss%.

With major defense cuts on the horizon, many of the large cap stocks may be in for troubled waters this year.  One of the main stocks to watch during 2013 is Northrop Grumman (NOC), which by some estimates holds over 60% of the total unmanned market.  The company manufacturers major unmanned systems programs of interest to the United States Navy including the MQ-8B Fire Scout and the X-47B, which is one of the competitors in the Navy's upcoming UCLASS solication.  Unmanned systems are one of the few rapid growth areas in defense spending, and will considerably influence this sector's performance in 2013.

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