Defense stocks down in 3Q, beat overall markets

With stocks suffering in the past year as the credit crisis grows, many investors saw shares of defense companies, which rely mostly on the government for sales, as a relative safe haven. But with the recent turmoil, shares have fallen sharply.

Shares of Chicago-based Boeing Co., maker of military equipment and commercial planes, were down nearly 13 percent in the quarter. On Tuesday, however, shares closed up up $1.88 to $57.35. Northrop Grumman Corp. shares were down 9.5 percent and closed at $60.54 Tuesday, down $1.05.

Lockheed Martin Corp., the Bethesda-Md.-based company that is the nation's largest defense contractor, was a bright spot, rising 11 percent during the three-month period beginning July 1. The company has said it doesn't believe it will be significantly affected by the recent seizing up of the credit markets, pointing to the $2.5 billion in cash reserves it holds. Lockheed shares were down 31 cents to $109.67 Tuesday.

The Philadelphia Stock Exchange's defense index was down about 3.5 percent for the quarter, better than the 8.9 percent drop in the S&P 500 Index during the same period. But the defense index, which tracks 17 defense and aerospace companies, reached a 52-week low of 320.81 Monday, dropping along with the sharp fall off in stocks after the House failed to pass a $700 bailout of the financial industry.

Defense stocks also face downward pressure as investors wonder whether November's presidential election and the economic crisis will lead to an eventual curtailing of defense spending.

"It therefore seems nearly impossible that outyear defense budgets will remain unscathed by the current fiscal reality," Merrill Lynch analyst Ronald Epstein wrote in a note Monday.

Shares of Waltham, Mass.-based Raytheon shares were down 4.9 percent in the quarter. On Tuesday, they fell 19 cents to $53.51 in afternoon trading. General Dynamics Corp., the Falls Church, Va.-based maker of tanks, ships and private jets, saw its stock fall 12.5 percent in the quarter. On Tuesday, General Dynamics stocks rose $2.22 to $73.62.