Though one would expect the aerospace and defense sector to do well in the fourth quarter of 2015, backed by the budget deal and escalating political disturbances, the estimate picture shows a somewhat contrasting tale ahead of the major earnings releases starting off from the next week. 

The U.S. economy is expected to have suffered in the fourth quarter of the year as the Atlanta Fed’s real-time Q4 GDP growth estimate is currently tracking at +0.6%, down from the earlier projection of +0.8% on Jan 8. This is a reminder that the country’s economic growth had started to cool off by the end 2015 given the weak readings on the nation’s manufacturing and construction activity, two key drivers of economic growth.
 
A strong dollar, weak energy prices, low global commodities prices and slowdown in overseas economies further added to the woes. Overall, the aerospace sector’s earnings are expected to decline 10.9% in the fourth quarter, as against the 2.4% earnings growth notched up in the third. Revenues too are expected to decline 2.8% overall (4.1% growth in Q3) while margins are expected at -0.63% (-0.13% in Q3).
  
Geo-Political Uncertainties: a Defense Tailwind
 
Despite a multitude of challenges, the long-term outlook for the defense industry has held up pretty well. The terror spawned by the Islamic State of Iraq and Syria (ISIS) sparked renewed anger around the world. The increased threat of global terrorism means more spending on defense and intelligence services. This has drawn market watchers to closely track defense stocks and the sector overall.
 
We have already seen how defense players performed well in the preceding quarter despite the familiar challenges of weak global economic growth, strong dollar and falling energy prices. Top defense contractors put up healthy performances on the back of mounting geopolitical risk and strong commercial sales.

Moreover, near the end of 2015, President Barack Obama signed a $1.1 trillion budget that included extra funding and tax breaks for fiscal 2016. The new budget deal will avert unseemly situations like a government shutdown and the need to fall back on stop-gap spending measures through fiscal 2016. The budget increases defense spending, a logical step in light of increasing unrest in the Middle East and other regions.
 
In spite of economic woes, the case for investing in defense stocks looks good. So, it is a profitable strategy to zero in on a handful of defense names that are poised to beat earnings estimates this quarter. An earnings beat would also pave the way for stock price appreciation.
 
How to Pick?

Picking the right stock for your portfolio could appear to be a daunting task given the wide range of companies in the aerospace and defense space. One way to confine the list of choices during this earnings season is by looking at stocks that have a solid Zacks Rank accompanied by a favorable Earnings ESP. The combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP is usually an indication of an earnings beat.