Reuters & Forbes pick: STST

[luka]

Christopher Donaghey
SunTrust Robinson Humphrey
Aerospace & Defense, Electronic Instruments

Aerospace and defense stocks in the S&P 500 have beaten the broader index thus far in 2005, but defense analyst Christopher Donaghey is cautious. "We don't necessarily have the brightest budget outlook at this point," he warns. Why the dimmer view? Donaghey puts the blame on a grim fiscal situation overall, the impact of disaster recovery and high operational costs of the war in Iraq.

Donaghey still believes his coverage area--mostly small- and mid-cap companies doing business in military intelligence, surveillance and communications--will be the best bets in defense. One stock he's particularly fond of is Argon ST (nasdaq: STST - news - people ). The Fairfax, Va.-based company makes sensor systems for military, intelligence and environmental use. Donaghey says the stock has been hit by concerns over the possible loss of a big subcontracting job for Lockheed Martin (nyse: LMT - news - people ). But he believes Argon's backlog and new business will help it meet the brisk growth numbers that Wall Street has forecast for it. The company's shares go for 23 times the consensus on projected earnings for the coming 12 months.