By E.B. Tucker, editor, Strategic Investor
The U.S. is currently facing enemies on every front.
But these battles aren’t fought with troops, tanks, and brawn…
That’s because the primary weapon today is technology.
And the military’s need for the best tech is a huge trend. And we have a strategy to profit.
War Is Changing
Shooting wars are rare these days. Most of our enemies have equal – or at least compelling – weapons. Aside from a skirmish, it’s unlikely we’ll see a major ground offensive or traditional fighting war.
Instead, the U.S. is fighting “shadow wars” behind the scenes… but these conflicts don’t look like traditional fighting. Modern warfare is far from sending young patriotic soldiers charging into battle. It’s high-tech, complex, and ever-changing.
But right now, the U.S.’s superpower status around the globe is being challenged.
President Trump doesn’t like that. The American military has to defend its status.
It’s not going to reduce its influence any time soon. But to do that, it needs to spend money for the best tech.
This means big business for private sector contractors… and their shareholders.
Last fall, I (E.B.) went to a Defense Advanced Research Projects Agency (DARPA) conference outside of Washington, D.C. I had the chance to sit in on panel discussions with the top military leaders and contractors.
In almost every setting, the message was modern warfare is a technology battle… and it changes so quickly, it renders old defense strategies useless.
The Obama presidency only made this problem worse. Defense spending under liberal presidents tends to suffer. Consequently, systems and capabilities don’t keep pace with the enemy.
While Obama presided over billions in grants to numerous other projects, during his time in office, he slashed defense spending.
That means today’s U.S. military systems are outdated, vulnerable, and under attack from rising world powers.
But President Trump is focused on addressing this issue.
This chart shows base-level defense spending back to 1976. Under the eight-year terms of Ronald Reagan and George W. Bush, spending surged. Today, it’s up 101% since 2000.
You can see that Trump doesn’t want America to fall behind in the technological arms race. That means out-of-date systems designed when the U.S. was the world’s lone superpower must go now.
Which leads to an opportunity for savvy investors…
How We’ll Profit
We feel confident the trend of higher defense spending has a long way to run… and that means the best private sector defense companies will capture much of that growing revenue.
Today, private contracting for the U.S. military is a big business with contracts worth tens of billions of dollars.
The military continues to sign large, secretive contracts with private sector defense services firms. It calls on these firms to provide services like security, data collection, aircraft maintenance, and even airspace monitoring.
However, there is a certain category of contracts that interests us most. It’s the kind of work that generates big revenue commitments over several years. In the industry, they call it Indefinite Delivery, Indefinite Quantity (ID/IQ).
ID/IQ is a special type of government contract in which the agency, usually the military, can call for more of a product, as needed, over a fixed period of time. Essentially, the military says it needs a lot of a certain product or service over the next five years, but it doesn’t know for sure how much.
For vendors, this is good business. The contract is typically exclusive. That means the vendor is the only provider of that particular service. The military isn’t shopping around or leveraging vendors.
Also, these contracts tend to be big. It’s common to see $500 million or more awarded to vendors. Payments run over several years and can go higher if the military demands more of the product or service. And the contract usually includes a minimum, so the company doesn’t have to worry about the military reducing its order.
As investors, we like to see a lot of these ID/IQ contracts when defense spending is on the rise. It means there’s a higher chance that the military will call for more of a product that these companies produce. That can mean a surprise increase in revenue.
Investing in companies that have locked in these contracts is the key to taking advantage of the boom in defense spending under Trump. And now’s the time to stake your claim before they take off.
Editor, Strategic Investor
P.S. I’ve found a top company set to benefit from this trend. And I shared it with subscribers of my Strategic Investor newsletter. It’s already up over 24% in four months. And with Trump’s defense spending showing no signs of stopping, I’m betting it will only go higher.
Strategic Investor subscribers can access this pick here. If you’re not a subscriber yet, and you want to learn the name of this company, as well as gain access to all of my research, go here to lock in your subscription today.