On Tuesday night, President Obama spoke to the nation from West Point to outline his plans for Afghanistan. The president told Americans that we can’t walk away from Afghanistan and that his plan involves a surge of 30,000 additional troops, plus adding support for the beleaguered government of Afghanistan. President Obama also said that he’ll ask NATO to send more troops.

Personally, I leave the politics for each person to decide for themselves. But I will highlight that Obama’s decision will have an important effect on the defense and aerospace sectors of the stock market. For stock pickers, this can be a very lucrative part of the market. The Spade Defense Index was up 1.4% the day after the president’s address.

Consider Precision Castparts (PCP). This is a small metal fabrication company with a significant military and aerospace component. The company is still not very well-known outside of national security circles. Nevertheless, Precision Castparts has been an amazing stock.

Thirty-five years ago, you could have picked up one share of Precision Castparts for just $8. Since then, the stock has split ten times, which would bring your adjusted buy price down to about seven cents a share. Meanwhile, Precision Castparts is currently trading for about $107 a share. In other words, that’s a profit about of close to 150,000%. Now do you see the potential in the military sector? This company is in league with Warren Buffett, yet many investors have never heard of it. Precision Castparts is a solid buy.

Now let’s run down some of my favorite and least-favorite defense stocks.

I want to start off by saying that I don’t currently see significant profit opportunities in the top-line defense stocks. I have the major players like General Dynamics (GD), Honeywell (HON) and Northrop Grumman (NOC) rated as Holds. This doesn’t mean that I don’t like the companies. I simply think they’re not obvious bargains at the moment. Right now, the most attractive values are in the smaller niche companies like Precision Castparts.

The Best Defense Stock to Buy Now – Smith & Wesson (SWHC)

Another example is Smith & Wesson (SWHC), which I currently rate a Strong Buy. To most folks, Smith & Wesson isn’t normally thought of as a defense stock, but the company’s business with the Pentagon is a large part of its sales. Smith & Wesson was founded in 1852 and is famous for its revolvers — most notably Dirty Harry’s .44-caliber pistol.

Obviously, this is one of the biggest names in the firearms industry. The company makes handguns, police accessories, military weapons and gun safety products but also sells a wide variety of other items. SWHC products include mountain bikes outfitted for police officers, car alarm systems and even apparel like watches and sunglasses that cash in on the famous Smith & Wesson brand. The company is clearly benefiting from government spending via military and law enforcement purchases, and has weathered the economic downturn just fine.

(SWHC is currently trading at around $5 per share. For details on four more bargain stocks under $5, click here.)

Defense Stocks to Sell – TASR, LMT, FLIR

There are a few defense stocks I want you to steer clear of. I currently have TASER International (TASR), Lockheed Martin (LMT) and FLIR Systems (FLIR) rated as Sells.

Be sure to check out Portfolio Grader for updates. In the past, we’ve made profits in all of these stocks so they may be buys again soon.

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