If you were to ask me what the most inefficient US market sector is, I would probably say defense.
Now, that’s something no one likes to hear.
How come the one sector the US government spends the most money on—the FY 2018 defense budget is $824.7 billion, more than that of the next nine countries combined—is the most inefficient?
Here’s what most people don’t understand: It’s inefficient by design.
Nobody wants war, yet governments are obliged to spend vast sums getting ready to fight it. They’re usually not very thrifty either.
For investors, that’s a perfect combination because inefficiency, in this case, spells opportunity. And right now is an especially good time to get your feet wet in defense spending.
Technology is changing the very nature of warfare. A lot of expensive equipment will get replaced in the next few years… and what replaces it may surprise you.
Leaderless Swarms of Drones
Warfare is still about arming soldiers and sending them to face the enemy. That may not be the case much longer.
Drone aircraft were the first breakthrough. They enable pilots to control their planes remotely, from a safe place, firing missiles when they see an enemy. A big step, but the big drones still resemble conventional aircraft.
The new drones are getting much smaller—and that will change everything.
A few months ago, I heard the head of the Pentagon’s Strategic Capabilities Office Dr. Will Roper speaking about “drone swarms.”
He argued that large numbers of small, inexpensive, autonomous drones working together can accomplish many of the same missions as expensive aircraft and human pilots.
The key to Dr. Roper’s vision: Drone swarms have no leader an enemy can target.
They operate much like a swarm of ants or bees. No single bee knows how to build a hive, protect the queen, and produce honey. But collectively, they still make it happen, which is quite impressive.
A few months ago on 60 Minutes, Roper demonstrated some of his drones—and I bet the DoD has even better ones still under wraps. Some are small enough to hold in one hand.
That doesn’t mean the US government will stop buying fighter jets and armored vehicles. Wise generals don’t give up a capability that an enemy might have. However, the defense industry will expand and change.
Today, leading companies profit by making sophisticated, expensive weapons platforms in relatively small numbers. Drones will be a different business. They’re small, simple, inexpensive, and the Pentagon will need a lot of them—maybe millions.
Customizing drones for particular missions will require an ability to produce them quickly, as needed. Who knows, companies might even develop mobile drone factories that can deploy to a war zone and produce new swarms every day.
The Defense Renaissance
Of course, no one likes being swarmed, and there are already commercial anti-drone technologies. For example, paparazzi photographers using drones to spy on celebrities now meet everything from net-carrying counter-drones to trained falcons.
I expect we’ll see years of rapid development for both military and civilian uses. A military reconnaissance drone swarm could also quickly search large areas for lost children or shipwreck survivors.
To me, that’s the really exciting part. Some of today’s ubiquitous technology originated in military applications. I wish we could develop them for peaceful reasons, but at least we have them.
Defense stocks never go out of style, and they’re about to enter a period of rapid innovation. I think there will be more great opportunities in this sector. I’m keeping my eyes open and I suggest you do too.
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