k RENEWED EMPHASIS ON DEFENSE The U.S. is about to embark on a six-year six-year strategic rearmament program after a decade of low-level defense spending. While it is most likely that the 1983 defense budget and procurement timetables for certain programs will be scaled down and some stretchouts will occur, President Reagan seems adamant on rearming the country in order to counter the growing military strength of the Soviets. Furthermore, the warring in El Salvador and the current military action between Argentina and Great Britain over the Falkland Islands drives home the need for a step-up in . defense strength. Even with the persistant outcries of various groups against the slimination of several social welfare and education loan programs, plus the mounting federal deficits, we doubt that the final defense budget will be drastically curtailed. Looming large against such cutbacks are the current recessionary conditions with attendant high unemployment and idle capacity. These factors are creating growing support from constituents for local defense work. Therefore, only a moderate reduction in defense spending targets is anticipated. The Research Department of Babson's Reports is forecasting that military spending could amount to some $1.6 trillion over the next six years, providing a significant economic stiumulus. We do suggest, however, that promising investment opportunities may be found in companies well positioned in commercial as well as military work. COMPONENTS OF DEFENSE PLAN The six-year defense plan consists of five components. These include: (1) Improvements in communications and control systems; (2) modernization of strategic bombers; (3) deployment of new submarine-launched missiles; (4) upgrading the strength and accuracy of new land-based missiles and reducing their vulnerability; and (5) advances in strategic capability and systems. Encircling this defense program are the MX missile, the "Stealth" bomber, sophisticated Trident nuclear submarines with new types of missiles, a North American surveillance network, a space-based missile defense plus an antisatellite system. Together with new F15 jet fighters and AW ACS surveillance aircraft, our total system of self-defense should be in place by 1986. ELECTRONICS AND COMMUNICATIONS VITAL Electronic countermeasures and warfare systems along with a completely integrated command, control, and communications network are increasingly important in supporting our vast array of technical missiles, attack aircraft, bombers, submarines, and other naval vessels. Electronic equipment accounts for over 40 percent of the cost of such systems. Growth over the next five years is projected at 20 percent annually. Continued updating of the equipment is vital. The new defense budget emphasizes c3 (command, control and communications)., These systems include display, data-processing equipment, software, data link terminals, and anteannas for satellite communications. Finally, sophisticated electronic and computer equipment is critical in the deployment of tactical missiles which have become an integral part of our defense. They provide incredible speed, low-flight path and electronic countermeasure defenses making them all but impossible to shoot down. RECOMMENDATIONS Babson's now advises purchase of four NYSE companies with solidly based positions in electronics, communications, and missile defense systems: Hazeltine near 29, but limit 33, P-E 25, yield 2.8 percent; M-A COM near 22, buy limit 25, P-E 20, yield 0.7 percent; Raytheon near 35, buy limit 40, P-E 9 yield, 4.0 percnet; and Sanders Associates near 47, buy limit 50, P-E 16, yield 1.4 percent. All are speculative grade, except average-grade average-grade Raytheon, and offer good long-term long-term potential.