S PA D E   I n v E S T o rJan 2018 www.spadeindex.comDefense * Homeland Security * Space

Vol 12 #1 ISSN: 1930-4781

SPADEDefense S&P500

4Q17 4.78% 6.12%2017 28.92% 19.42%2016 17.95% 9.54%

SPADE Defense Index Statistics12/29/17 Close 6265.2412/31/16 Close 4859.74All-time Intraday High: 29 December 2017 6304.75All-time Closing High:28 December 2017 6296.26

THE

Commentary

(R)(R) (R)

continued on page 3

Exchange Traded Fund (ETF)

The SPADE Defense Index hasbeen licensed to Powershares andserves as the underlying index forthe Powershares Aerospace &Defense ETF (NYSE Arca: PPA).

Licensed Products

Like last quarter, the index ended at its all-time, historic highs. I almost feel like I shouldjust end the letter here but let’s put this into some perspective. After all, what are highsreally when the market is at all times highs itself?

- This is the 6th consecutive year the SPADE Defense Index beat the S&P500

- Over this time, it produced a compound performance of 202.54%, outperforming the S&P500 by 899.6 bps!

Prior to that the index underperformed in each of the past three years, gaining 29.75% vs.39.23% for the broader market. Though it underperformed, I think most of us would takea 29.75% gain over three years in a downturn.

Especially considering that before that, the Index outperformed the market for 9 consec-utive years producing a gain of 61.92% while investors trying to match the market expe-rienced LOSSES of 53.45%.

The 2018 ForecastHas the sector reached full valuation?  Is it overvalued? Is there still room to run?

Here are some of my thoughts:1. Trump’s FY2018 budget is a historic defense buildup.  At $603 billion it is $54B abovethe Budget Control Act caps.

2. The 2017 surge in aerospace and defense sector stocks was fueled by Boeing, whichhas more than tripled from its lows. We’ve talked about being in the midst of a commer-cial aerospace supercycle over the past few years, but let’s put a few numbers to it. In2017, the firm delivered 763 planes (a record), posting net orders for 912 planes (whichtotals $134.8 billion at list prices), and has a backlog of 5,864 planes (this translates toroughly seven years operating at full production). This is requiring Boeing to boost pro-duction of its 737 narrowbody from 47/mo to 52/mo. While the outlook looks favorableand the delivery ramp-up will boost profits and cash flow, analysts are commenting thatsupply chain hiccups could pose short term risks.

3. International Sales -- Defense Secretary Jim Mattis has declared the build- up ofpartnercapabilities as a key objective. As such Deputy Secretary of Defense Patrick Shanhan hasbeen meeting to speed up the Foreign Military Sales process and identified Japan, South

SPADE Defense Index December 2017 Rebalance

No index changes occurred.

Corporate Actions Affecting theIndex During the QuarterMDA’s acquisition of DigitalGlobe(DGI) closed during 4Q17. The firmdual listed on the NYSE andchanged its name to MaxarTechnologies (MAXR). United Tech’s acquisition ofRockwell Collins and NorthropGrumman’s acquisition of OrbitalATK remain pending.

Check out our new and updated website—www.spadeindex.com / defense

The SPADE Investor * January 2018 Page 2

1 FLIR Systems 19.81%2 AXON International 16.89%3 Curtiss Wright 16.56%4 Viasat 16.37%5 Boeing 16.01%6 Cubic Corp 15.59%7 SAIC 14.54%8 Teledyne Tech 13.80%9 Maxar Tech 12.66%

10 KBR 10.91%

4Q17 Leaders

ETF Statistics (nYSE: PPA)Powershares Aerospace & Defense Exchange / Ticker Symbol: NYSE / PPAAssets (12/29/17) $862MClosing Price (12/29/17) $53.90 Yield (TTM) 1.16%4Q2017 Volume 5,015,485Turnover 10%

source: Yahoo Finance 12/30/17

Portfolio Price / Earnings* 23.55Portfolio Price / Book* 4.67Portfolio Price / Sales* 1.82Portfolio Price / Cash Flow* 16.05Beta (3 year)* 0.84Alpha (3 year)* 9.89R-squared (3 years)* 52.1

source: Yahoo Finance 12/30/17

1 Aerovironment 109.32%2 Boeing 89.43%3 Comtech 86.67%4 Aerojet Rocketdyne 73.82%5 Mercury Computer 69.92%6 BWX Technologies 52.37%7 Orbital ATK 49.89%8 Teledyne Tech 47.28%9 Rockwell Collins 46.21%10 Kratos Defense 43.11%11 Oshkosh Truck 40.67%12 Harris Corp 38.24%13 Honeywell 32.38%14 Raytheon 32.29%15 Moog 32.23%16 Northrop Grumman 31.96%17 Elbit Systems 31.81%18 L-3 30.07%19 Vectrus 29.35%20 Maxar Technologies 28.92%21 FLIR Systems 28.82%22 Lockheed Martin 28.45%23 Huntington Ingalls 27.97%24 Leidos 26.26%25 VSE Corporation 25.08%26 Curtiss Wright 23.88%27 Cubic Corp 22.94%

2017 results

28 Heico 22.29%29 Kaman 20.25%30 Hexcel 20.24%31 FireEye 19.33%32 AAR Corp 18.88%33 KBR 18.81%34 Mantech 18.79%35 General Dynamics 17.83%36 Textron 16.54%37 United Technologies 16.37%38 Viasat 13.03%39 Ducommon 11.31%40 Woodward 10.85%41 Transdigm 10.31%42 Axon International 9.32%43 CACI 6.48%44 Booz Allen 5.71%45 Triumph Group 2.64%46 Ball Corp 0.84%47 Sparton [3.31%]48 CSRA [6.03%]49 SAIC [9.71%]50 OSI Systems [15.41%]51 Engility [15.82%]52 Esterline Tech [16.26%]53 Key W [50.21%]

1 OSI Systems [29.54%]2 Key W [22.86%]3 Kratos Defense [19.04%]4 Engility [18.19%]5 Esterline Tech [17.14%]6 FireEye [15.32%]7 VSE Corp [14.83%]8 Ducommon [11.23%]9 Aerojet Rocketdyne [10.88%]

10 Elbit Systems [9.38%]

4Q17 Laggards

The SPADE Investor * January 2018 Page 3Commentary (continued from page 1)Korea, and the Middle East as targets. In 2017, US companies received roughly $22B in orders from the NearEast/Central Asia and $8 billion from the Indo-Pacific.

4. The military IT budget figures to benefit with the rebound in defense spending as the Pentagon’s Third OffsetStrategy states that the services should push to field emerging cyber, autonomy, artificial intelligence, and robotics tech-nologies. This could reverse the fortunes for this segment which has lagged for several years. The 2018 NationalDefense Authorization Act has $33.2 billion in unclassified IT funds, (per immixGroup)-- with the department-wide ITbudget increasing from $10B to $11B and the Navy-Marine Corps budget increasing from the low-$7B range to around$8B. The Army has budgeted $9B and the Air Force, mid-$5B. (immixGroup). Key areas of interest are automatingmore of its cyber functions and placing them in the cloud and self healing network capabilities.

5. The industry is positioning itself for growth in the space market. SpaceX may capture the news regarding rocketlaunches and grand exploration schemes, but space infrastruture is a $100B business. In 2017, Northrop Grummanbought Orbital ATK and MDA bought DigitalGlobe. Analysts have begun to discuss that the Pentagon envisions aspace war will happen at some point and the Air Force has indicated it wants to manage space battles in real-time.

6. So what can negatively impact aerospace & defense stocks in 2018? Besides the aforementioned supplier concerns,many of the issues that analysts have cited relate to contracting issues.

a) Acquisition reform at the pentagon could pressure contractors. b) Contractors face pressure to accept more risk on contractsc) Fixed price incentive for development work are becoming more common, with cost-plus declining.

2018’s Wall of Concern

1. Donald Trump - This is not a personal political opinion  Regardless of everyone’s beliefs, and there are many strong oneson both sides, tweets designed to enrage or a leak of intelligence information that might lead to an international incidentremains a major concern among the intelligence community. 2. North Korea increasing rhetoric combined with its growing nuclear and rocket launch capabilities. 3. Rising US-China tensions spurred by trade disputes and China flexing its muscles near the Sea of Japan4. If the election in Germany leads to a change in leadership, how does the country and broader Europe react?5. Iran:  Internal protests are on the rise. A Saudi Arabia-Israel partnership harden positions6. ISIS: While they have lost influence in Syria and Iraq, they continue to support small attacks around the globe. 7. Evolving players in the Middle East: Saudi Arabia continues to change under Mohammed bin Salman, Egypt and Iraq con-tinue to see internal strife, the US declares Jerusalem capital of Israel 8. Venezuela chaos intensifies and its continued deterioration could lead to a humanitarian crisis.9. Bloodshed in Mexico continues with 23,968 homicides in the first 10 months of 2017 (up 27%)10. It has been suggested that Putin’s anticipated re-election in 2018 would lead him to focus on Georgia and Belarus, but fornow it appears to be just idle speculation based on past actions. 11. Attacks on cryptocurrencies attempt to destabilize a market that is trying to gain recognition as a stable currency option. 12. The boom in electric vehicles, solar and wind generation, and handheld electronics rely on materials that enable powerstorage: copper, lithium, nickel, cobalt. Will this eventually lead to conflict as countries scramble for the materials when theyare in short supply?

continued on page 5

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PO Box 5752Bethesda, MD 20824-5752

Tel: (703) 524-2766info@spadeindex.com

http://www.spadeindex.com

About the SPADE Defense IndexThe SPADE Defense Index (NYSE: DXS) provides an investment benchmark forthe value that the market ascribes to companies involved with defense, homelandsecurity, and space.

The Index is designed to reflect the broad diversity of activities that is representa-tive of companies involved with the sector – including industrial firms that manu-facture aircraft, tanks, ships, and missiles; and those involved with current and nextgeneration systems related to network centric warfare and information technology;intelligence, surveillance, and reconnaissance; satellites; border security; anddefense systems that protect the lives of our servicemen and servicewomen.

* * * SPADE Indexes specializes in designing and managing equity benchmarks for ETFand other products.

rulesThe Index was designed to be RIC (registered investment com-pany) compliant for the purpose of enabling financial products.Companies are required to meet a variety of eligibility criteriaincluding market valuation, liquidity, and listing on a majorU.S. exchange. Full details are available on our website. * Market Cap: Minimum $100M* Share Price:   Minimum $5.00* Sufficient Liquidity

The SPADE Investor * January 2018 Page 4

Two-year chart comparing Powershares Aerospace &Defense ETF “PPA“ (blue) with the S&P500 (red)

SPADE DefenseIndex

S&P500 Alpha(bps)

2017 28.92% 19.42% 9502016 17.95% 9.53% 8422015 3.23% [0.73%] 3962014 11.77% 11.39% 382013 48.27% 29.60% 18672012 16.30% 13.41% 2892011 [2.75%] [0.00%] [275]2010 9.62% 12.78% [316]2009 21.71% 23.45% [174]2008 [38.03%] [38.49%] 46

Performance (ex div)SPADE Defense

IndexS&P500 Alpha

(bps)2007 22.17% 3.53% 18642006 19.33% 13.62% 5712005 5.30% 3.00% 2302004 20.47% 8.99% 11482003 37.27% 26.38% 10892002 [2.87%] [23.37%] 20502001 0.94% [13.04%] 14882000 4.98% [10.14%] 15121999 15.31% 19.53% [422]1998 6.63% 26.67% [2004]

2017 Was a Record for Aerospace and Defense DealsAccording to PriceWaterhouseCoopers, there were 454 dealsin the sector (the same as 2016) totaling a record $72 billion,

surpassing the $67 billion set in 2015. Fueled by geopoliticaltensions, a growing emphasis on missile defense in light ofan emerging North Korean threat, and the Trump administra-tion’s push for increased defense budgets.

Date Acquirer Target Deal Value ($M)9/4/17 United Technologies* Rockwell Collins* $30 billion9/18/17 Northrop Grumman* Orbital ATK* $9.17 Billion1/19/17 Safran SA Zodiac Aerospace $7.84 Billion12/17/17 Thales SA Gemalto NV $5.40 Billion10/28/17 China Shipbuilding Wuchang Shipbuilding $3.55 Billion2/24/17 MDA DigitalGlobe* $2.13 Billion6/13/17 Hyundai Robotics Hyundai Heavy Industries $1.27 Billion6/28/17 Ex-Im Bank of Korea Daewoo Shipbuilding $1.13 Billion4/7/17 China Merchants Industry Soares Ltd $1.10 Billion1/27/17 Veritas Capital Partners Harris Corp - Govt IT* $690 Million

The SPADE Investor * January 2018 Page 5

Key 2018 Contracts to Watch For* T-X Trainer—Air Force looking to replace aging fleetof Northrop T-38C Talons and will decide in July whoreceives about $16B for 350 aircraft. Lockheed andBoeing competing. Bid protest likely because both com-panies believe they have the right solution.* MQ-25 Stingray – Navy carrier-based drone for aerialrefueling. Pentagon earmarked $2.16B through 2021though total value would be larger. Competition betweenLockheed, Boeing and General Atomics (NorthropGrumman announced dropping out of race in October)* Hypersonic Weapons—By end of March the Air Forceexpects to award a contract for hypersonic strikeweapons. Lockheed, Northrop, Boeing, Raytheon, andOrbital ATK (being bought by Northrop) are bidding onthe contract. Anticipated to be a highly disruptive battle-field technology since stealth. * Ground Vehicles-Army plans to award two engineeringand manufacturing development contacts for a new lighttank. General Dynamics, BAE Systems, and SAIC perDefense News are bidders. The Marine Corps is alsoexpected to decide between BAE Systems and SAIC forits Amphibious Combat Vehicle.

Inside Janes (UK) Global Defense Spending Forecast - Global defense spending to reach $1.67 Trillion in 2018- Highest level since the end of the Cold War (was $1.63T, 2010)- Grow for the 5th consecutive year, up 3.3%- Driven by largest year-on-year increase in US spending since2008, up 4.7%.- Funding for procurement to rise from $295B in 2017 to $315Bin 2018 (globally)- Global defense expenditures have actually dropped from 2.7% ofGDP to 2.2% over the last decade- US DoD accounts for 40% of all global defense expenditures. - US has spent around $10 trillion on defense since the 9-11attacks in 2001.- Nine NATO members will reach 2% of GDP benchmark for2018, the highest since the financial crisis. This includes US,Greece, Estonia, Turkey, Latvia, UK, Lithuania, Poland, andRomania- Spending in Europe is expected to increase by 1.3% in 2018,driven by stable government balance sheets, the perceived threatfrom Russia on NATO’s easter border, and several key procure-ment programs coming online. Growth will depend on Germancoalition discussions.  Growth in Eastern Europe mainly due toRussia’s intervention in the Ukraine in 2014 and focused on mili-tary modernization. It is a leading spender of military groundvehicle market.

Top 10 Deals

The SPADE Investor * January 2018 Page 6

FY-2018 Budget Charts

The SPADE Investor * January 2018 Page 7

End of 4Q17 Market Forward Price/ Price/ PEG

Cap P/E Sales Book 5 yr Div Yld

Percent 30-Sep-17 29-Dec-17 YTD QTD intraday (ttm) ttm mrq expected forward %

Company Ticker Price Price % Ch % Ch

Flir Systems FLIR 1.52% 38.91 46.62 28.82% 19.81% 6.46 22.31 3.63 3.42 1.58 1.25%

AXON International Inc. AAXN 0.33% 22.67 26.50 9.32% 16.89% 1.40 94.64 4.23 8.43 8.16

Curtiss Wright CW 1.29% 104.54 121.85 23.88% 16.56% 5.38 23.66 2.42 3.65 2.28 0.49%

Viasat Inc VSAT 1.03% 64.32 74.85 13.03% 16.37% 4.36 115.15 2.78 2.36

Boeing Co BA 6.91% 254.21 294.91 89.43% 16.01% 175.64 26.62 1.92 162.22 1.69 2.32%

Cubic Corp CUB 0.38% 51.00 58.95 22.94% 15.59% 1.60 23.58 1.08 2.32 5.39 0.46%

SAIC SAIC 0.81% 66.85 76.57 -9.71% 14.54% 3.27 19.29 0.75 10.23 4.21 1.62%

Teledyne Technologies TDY 1.52% 159.18 181.15 47.28% 13.80% 6.42 25.7 2.62 3.46 1.01

Mantech International'a' MANT 0.47% 44.15 50.19 18.79% 13.68% 1.96 29.18 1.19 1.54 10.84 1.66%

Maxar Technologies MAXR 0.560% 57.09 64.32 28.92% 12.66% 3.66 12.66 2.41 2.74 1.77%

KBR KBR 0.68% 17.88 19.83 18.81% 10.91% 2.78 14.58 0.63 3.2 -5.47 1.60%

Oshkosh Truck OSK 1.63% 82.54 90.89 40.67% 10.12% 6.78 17.61 0.99 2.95 1.57 1.06%

United Technologies UTX 6.94% 116.08 127.57 16.37% 9.90% 101.87 18.65 1.73 3.41 4.52 2.19%

Leidos LDOS 2.32% 59.22 64.57 26.26% 9.03% 9.77 16.86 0.95 2.96 2.27 1.97%

Honeywell Intl HON 6.91% 141.74 153.36 32.38% 8.20% 116.06 19.74 2.93 5.54 2.63 1.93%

BWX Technologies BWXT 1.43% 56.02 60.49 52.37% 7.98% 6.01 27 3.62 19.52 2.21 0.73%

Comtech CMTL 0.12% 20.53 22.12 86.67% 7.74% 0.52 34.56 0.97 1.10 2.90 1.81%

Hexcel HXL 1.35% 57.42 61.85 20.24% 7.72% 5.56 21.4 2.86 3.89 3.35 0.80%

Harris Corp HRS 3.97% 131.68 141.65 38.24% 7.57% 16.88 20.56 2.87 5.65 0.84 1.60%

Transdigm TDG 3.41% 255.65 274.62 10.31% 7.42% 14.27 18.52 4.07 -4.83 2.66

Northrop Grumman NOC 5.51% 287.72 306.91 31.96% 6.67% 53.43 22.87 2.09 8.23 2.69 1.30%

Kaman KAMN 0.38% 55.78 58.84 20.25% 5.49% 1.64 21.47 0.93 2.65 2.54 1.36%

Heico HEI 1.91% 89.81 94.35 22.29% 5.06% 7.16 34.69 4.69 6.86 3.22 0.19%

Textron TXT 3.66% 53.88 56.59 16.54% 5.03% 14.91 19.65 1.06 2.56 2.30 0.14%

L-3 Communications Hldgs LLL 3.65% 188.43 197.85 30.07% 5.00% 15.46 22.16 1.40 3.09 8.71 1.51%

Moog Inc. MOGA 0.74% 83.43 86.85 32.23% 4.10% 3.12 22.27 1.24 2.56 2.27

Huntington Ingalls HII 2.60% 226.44 235.70 27.97% 4.09% 10.67 19.56 1.45 6.24 10.70 1.21%

AAR Corp AIR 0.32% 37.78 39.29 18.88% 4.00% 1.34 16.51 0.73 1.47 0.93 0.76%

AeroVironment AVAV 0.32% 54.12 56.16 109.32% 3.77% 1.32 67.66 4.45 3.39 2.86

Rockwell Collins COL 4.02% 130.71 135.62 46.21% 3.76% 22.20 17.92 3.25 3.66 1.65 0.97%

Lockheed Martin LMT 6.98% 310.29 321.05 28.45% 3.47% 92.05 23.96 1.85 43.88 9.45 2.48%

Booz Allen BAH 1.36% 37.39 38.13 5.71% 1.98% 5.56 18.51 0.92 10.35 2.23 1.78%

Raytheon Co RTN 5.64% 186.58 187.85 32.29% 0.68% 54.30 22.66 2.19 5 2.50 1.69%

Vectrus VEC 0.08% 30.84 30.85 29.35% 0.03% 0.34 14.9 0.31 2.41

Sparton SPA 0.05% 23.21 23.06 -3.31% -0.65% 0.23 20.05 0.60 2.86 1.37

Mercury Computer Sys MRCY 0.57% 51.88 51.35 69.92% -1.02% 2.48 34.01 5.80 3.27 3.18

General Dynamics GD 6.29% 205.58 203.45 17.83% -1.04% 60.75 19.38 1.95 5.25 1.92 1.69%

Orbital ATK OA 1.81% 133.16 131.50 49.89% -1.25% 7.59 19.51 1.62 3.70 2.10 0.97%

Woodward WWD 1.12% 77.61 76.54 10.85% -1.38% 4.69 19.23 2.23 3.41 1.82 0.64%

Digital Globe DGI 35.25 34.40 20.07% -2.41%

Caci Intl CACI 0.77% 139.35 132.35 6.48% -5.02% 3.26 17.98 0.75 1.78 3.12

CSRA Inc. (16Nov15 split) CSRA 1.17% 32.27 29.92 -6.03% -7.28% 4.90 14.6 0.98 10.98 1.56 1.33%

Ball Corp BLL 3.17% 41.30 37.85 0.84% -8.35% 13.25 16.31 1.23 3.75 1.67 1.06%

Triumph Group TGI 0.32% 29.75 27.20 2.64% -8.57% 1.35 9.75 0.41 1.58 -0.87 0.58%

Elbit Systems ESLT 1.36% 147.08 133.29 31.81% -9.38% 5.50 20.10 1.66 3.41 1.98 1.32%

Aerojet Rocketdyne AJRD 0.49% 35.01 31.20 73.82% -10.88% 2.34 31.20 1.25 15.18 1.81

Ducommon DCO 0.08% 32.05 28.45 11.31% -11.23% 0.32 33.47 0.58 1.43 -5.20

VSE Corporation VSEC 0.13% 56.86 48.43 25.08% -14.83% 0.53 10.86 0.67 1.89 0.57%

FireEye FEYE 0.59% 16.77 14.20 19.33% -15.32% 2.62 3.57 3.35 -5.28

Esterline Technologies ESL 0.54% 90.15 74.70 -16.26% -17.14% 2.22 15.96 1.11 1.22 1.90

Engility EGL 0.25% 34.68 28.37 -15.82% -18.19% 1.04 13.2 0.53 1.45 -2.61

Kratos Defense & Security KTOS 0.19% 13.08 10.59 43.11% -19.04% 1.09 34.16 1.49 2.06 8.15

KEY W Holding KEYW 0.06% 7.61 5.87 -50.21% -22.86% 0.29 48.92 0.75 0.98 -0.44

OSI Systems OSIS 0.29% 91.37 64.38 -15.42% -29.54% 1.22 16.42 1.22 2.11 -1.22

Data Provided by Yahoo Finance, Thomson Reuters (P/E, PEG), Morningstar (div)