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The US defense budget is 48 percent of the world’s total spending on military preparedness. Don’t expect any major changes.

US defense stocks shuddered as the new administration took over. There had been--and continues to be--talk that the military will be sold off or sold out by the new crew in Washington.

Fear is a potent motivator, but in this case emotion isn’t rooted in fact.

First, there are tens of thousands of combat and support personnel in Iraq that will be there for some time.

Second, troop force has been increased in Afghanistan, a country sandwiched between a bellicose Iran and a destabilizing nuclear power, Pakistan.

Third, global competitors such as China and India are forging new alliances and ramping up military spending as domestic stimulus and “national security” necessitates.

If those facts don’t change your mind, look at Defense Secretary Robert Gates’ 2010 budget proposal.

The Gates Plan fueled talk among the chattering classes that major defense programs would be scrapped, that we were going back to sharp sticks and slingshots for the troops. Mr. Gates has actually increased spending by $10 billion over what was planned during the Bush administration.

What’s really happening takes a bit more time to explain than a 20-second sound bite.

For example, the Defense Dept (DoD) is ending the F-22 fighter program, but it’s increasing funding for the F-35 fighter program. It’s canceling the Army’s Future Combat System vehicle buying, but it’s rebuilding the program under an acquisition program that gives DoD more control over costs and reins in contractors. It’s scrapping the DDG 1000 but building more DDG 51s and more Littoral Combat Ships.

These are only a few of the big programs Mr. Gates adroitly killed so he could funnel monies to more strategic projects.

Below are a handful of long-term winners in the defense industry. A few offer significant upside in one of the most dynamic sectors in the industry, C4ISR (command, control, computing, communications, intelligence, surveillance and reconnaissance). The others are big firms that offer stability yet also have a lot of headroom.

Guns, Butter, Bullets and Missiles

Defense giant Raytheon (NYSE: RTN) is a leader in advanced electronics and sensor systems. That puts the company in prime position to benefit from the US military's modernization drive.

Its two largest units are missile and integrated defense systems. The former develops advanced missiles and missile guidance systems such as the Phalanx, the next-generation Patriot anti-ballistic missile system made famous in the first Gulf War, and the famous Tomahawk long-range precision strike missiles.

Raytheon's integrated defense division provides engineering and integration services related to defense applications such as installations of missile systems and modernization of legacy aircraft and ships.

The company is also emerging as a leader in cyber security, a major DoD spending priority. It builds systems used to monitor sensitive government networks and databases to protect that critical data from intruders.

Raytheon’s focus on high-tech electronics and software has long allowed it to post the highest profit margins of any of the major defense firms. It’s also one of the few US defense firms with no net debt. Raytheon is a buy under 55.

It doesn’t get any simpler than Alliant Techsystems (NYSE: ATK), the leading supplier of military ammunition in the world. It’s also a leader in missile, missile guidance and aerospace work.

Alliant was launched as an independent company in 1990 when Honeywell (NYSE: HON) spun off its defense operation. This business supplied defense products and systems to the US and its allies for 50 years.

Alliant expanded into the aerospace market with the acquisitions of Hercules Aerospace in 1995 and Thiokol Propulsion in 2001. These deals transformed the company into the world’s largest supplier of solid propellant rocket motors and a leading provider of high-performance composite structures.

The company is growing at a nice clip, and with the history it’s inherited (as well as the business lines), its future is onward and upward. The stock has been strong of late--not surprising given the sectors that are driving its core business.

Buy Alliant Techsystems up to 87.

ISO C4ISR

Most of the companies that dwell in the world of C4ISR don’t have the visibility of the firms that build ships and planes and tanks. They tend to be more discreet because their business is based on stealth and discretion. It’s simply not in their nature to be front-page players in the industry.

Many of their clients are intelligence agencies and special forces units, few of which want their contractors trumpeting major deals about upgrades to intelligence gathering. It defeats the purpose.

These companies tend to be smaller and focused, which gives them the ability to adapt quickly to their clients’ needs, charge a premium for products and maintain significant R&D resources; marketing isn’t a major expense.

Most of their clients know where to go to get what they need, and few have access to these quiet clients.

L-3 Communications (NYSE: LLL) is the eighth-largest defense contractor in the world. Unlike most of its large-cap peers, the company isn’t reliant on any single government program; no contract accounts for more than 5 percent of total sales.

L-3’s products and services are integrated into a large number of projects, reducing the odds that a program cancellation would stagger the firm’s bottom line.

Modern warfare is transitioning from large battlespaces to a collection of small, tactical operations carried out by elite, focused forces. These forces must have access to the best intelligence and surveillance information possible and require secure, reliable communications links with their commanders.

L-3’s C3ISR unit supplies signals intelligence (SIGINT) and communications intelligence (COMINT) systems that allow units in the field to collect and analyze intelligence and communications in real time. The company also sells specialized antennae and sensors used to collect and transmit critical reconnaissance data.

C3ISR accounts for roughly 20 percent of L-3’s total revenue, and it’s easily its fastest growing segment. Management expects C3ISR systems to grow by 12 percent this year.

Like most large, multinational organizations, the US military outsources some functions and services to keep costs down. L-3’s Government Services division handles many of these contracts, performing tasks such as military training, legacy equipment maintenance and integration and maintenance of information technology systems.

And the company has been growing even faster abroad, providing services directly to allied militaries and in support of US programs overseas.

Trading at less than 10 times earnings, L-3 is as cheap as it’s ever been. That’s despite strong growth prospects and the most diversified contract mix of any large US defense firm.

L-3 Communications is a buy under 90.

Two other smaller companies in this space worth a look, especially now, are QinetiQ (OTC: QNTQY, London: QQ.) and FLIR Systems (NSDQ: FLIR).

QinetiQ (pronounced “kinetic”) was formerly the UK’s Ministry of Defence R&D lab, the largest in Europe. The company was privatized a few years ago, but it still maintains its impressive client list in the UK. It also entered into the US and Canadian markets with its subsidiary QinetiQ North America (QNA).

QNA has added some impressive former US defense and intelligence players to its management, which means that when QNA goes looking for work, they head straight to the top. And QNA has been doing well expanding its business on this side of the Atlantic.

The UK government sold off its large position in the company last year, which helped the stock gain traction in the market. But it’s been hammered recently because its operations in the US and Europe have doubled its exposure to the economic instability we’re going through.

Long term, however, its C4ISR markets and complementary divisions, both in North America and the UK, make its prospects bright. Buy QinetiQ Y shares on the US over-the-counter market up to 10; buy up to 185 pence on the London Stock Exchange.

FLIR has been featured in past issues of PF; the current market maelstrom gives you another opportunity to pick it up on the cheap.

The name is an acronym for Forward Looking Infrared; the company makes thermal imaging cameras that can see through clouds, rain, snow, darkness, you name it. Forward deployed troops use these cameras on their vehicles; install them at base and forward camps; and use them in unmanned aerial systems, unmanned ground vehicles and for marine operations.

FLIR has expanded its product line to consumer security, including industrial and automotive sectors. Its consumer division was growing faster than its military division, and the stock reflected the rosy prospects of that continued growth.

It’s had its haircut, and no one is interested in optimistic projections. But the potential growth in unmanned systems for use by Uncle Sam will move this stock in coming years. It’s also an attractive takeover target. Buy FLIR Systems below 28.

Elliott H. Gue is editor of Wall Street Winners the premier monthly growth newsletter designed to manage investor’s portfolio risk. Mr. Gue examines the market sector by sector to find the industries with big tailwinds and avoid investing pitfalls. Mr. Gue uses both top-down and bottom-up approaches to search the global stock and currency markets for strong intermediate-term trends, picking investment vehicles accordingly.

Mr. Gue is also editor of Trading Floor Pro and a research analyst for Personal Finance, where he specializes in global equity and debt markets and also has broad interests in technology and sector investing.

He has worked and lived in Europe for five years, where he completed a Master’s degree in Finance from the University of London, the highest-rated program in that field in the U.K. He also received his Bachelor’s of Science in Economics and Management degree from the University of London, graduating among the top 3 percent of his class. Mr. Gue was the first American student to ever complete a full degree at that business school.