BUY OR SELL-Defense contractors under Obama

NEW YORK Nov 5 (Reuters) - Is it a good time to buy defense stocks, which generally fare better than others in a recession?

Or is it already too late to profit from the consensus view that ascendant Democrats will not slash U.S. defense spending?

The Pentagon's budget is expected to grow more slowly under Barack Obama, after the war-fueled bonanza of the past seven years, but the President-elect has signaled there will be no major program cuts for at least 18 months.

Even if there are cuts, history suggests the sector fares as well, if not better, during Democrat administrations as Republican ones.

BUY ON DIP

"We see significant upside potential for all of the large defense prime stocks," said Douglas Harned, an analyst at Sanford C. Bernstein, even factoring in declining growth in defense spending.

If defense stocks go down in the the run-up to Obama's administration, it would be "a buying opportunity," he added.

The new government may look to cut high-risk or troubled programs, but labor-intensive projects -- such as the Joint Strike Fighter -- will be well supported by Congress to preserve jobs, in his view.

Harned sees Lockheed Martin Corp (LMT.N) as the top pick among pure-play defense companies, with substantial long-term growth promised by the JSF, the United States' next-generation fighter jet, which eight other countries have committed to buy, making it an unlikely target for cuts. He also rates missile maker Raytheon Co (RTN.N) as an outperform.

GOOD DEFENSIVE SECTOR

"Obama's victory is probably no worse for the outlook for defense and could even prove to be better than the alternative," said Harry Nourse, an analyst at Bank of America.

"The sector offers a relative haven during recessionary periods, due to the lack of correlation between GDP growth and defense funding," he said.

Nourse's analysis over the past 35 years shows defense stocks tend to slightly outperform other sectors in the month after a Presidential election, regardless of which party wins.

Obama's chief defense advisor, former Navy Secretary Richard Danzig, does not expect defense spending to decline in the first years of his administration, Nourse said, which should provide some comfort for investors.

But the time to profit may have passed.

"The markets will have largely anticipated this development, with an Obama victory having become increasingly likely over the last six weeks," Nourse said.

The Standard & Poor's Aerospace and Defense index .GSPAERO has risen 23 percent in the past week since hitting a 4-1/2 year low last Monday. It is still down 37 percent from the all-time high in October 2007.

STAY ON SIDELINES

"The Obama Administration intends to curtail defense spending growth, with an eye for a potential defense budget peak possibly in 2010 or the year after," said analyst Heidi Wood at Morgan Stanley, who suggests staying on the sidelines for now.

Obama has agreed with his defense leaders not to cut the Pentagon's budget within his first 18 months in office, Wood said, but after that will focus on cutting inefficient programs.

"This new team intends fewer new program starts, possibly shorter-lived programs, less over-reaching technology, focus on affordability, cost control and greater interoperability with U.S. allies," according to Wood.

In such an environment, Wood, who describes herself as "long-time bull" on defense, forcasts no special performance from the sector and says she remains on the sidelines.

She rates only two companies overweight: Lockheed Martin and General Dynamics Corp (GD.N), which is dominant in armored vehicles and business jets. (Reporting by Bill Rigby; Editing by Andre Grenon)