(FORTUNE Magazine) – A lot of jokes have circulated lately about how a President Bush in the White House makes it seem as if the clock has been turned back 12 years. But if defense companies had their choice, they'd probably prefer to go back further than Bush pere. Because the real glory days for defense contractors came during the Reagan era, when the Great Communicator could just as well have been called the Great Profit Maker for companies like Lockheed and General Dynamics.

Of course, a lot has changed in the industry over the past 20 years. For one thing, the number of major contractors has been greatly reduced. Decade-long spending cuts forced consolidation, to the point where there are now just five: Lockheed, Boeing, Raytheon, General Dynamics, and Northrop Grumman. But with President Bush vowing to increase spending on missile defense and an overall modernization of the armed forces, it looks like Reagan redux right now: the perfect time to consider getting defensive with your portfolio. Analysts project military expenditures to jump anywhere from 7% to 10% a year for the next five years. While the hawk trend isn't limited to GOP administrations--the S&P Aerospace/Defense index rose 55% in 2000, after all, during a brutal year for the rest of the market--most experts think the sector still has a lot more room to run.

The lone question, it seems, is figuring out where all that money is going to be spent. The Clinton defense budget earmarked just $12 billion over the next six years for a missile defense system that could protect the U.S. from overseas threats, but if proponents of the program get their way, that number could swell to $50 billion in the coming decade. What's more, a host of other weapons systems are currently under consideration--everything from stealth destroyers to next-generation fighter jets to armored amphibious troop carriers. Granted, not all those programs will get the green light--and some of those that are fairly far along in development may well be canceled under the Bush budget.

Even amid the uncertainty of backroom politics, however, it's still possible to capitalize on the spending boom with smart investments right now. The best strategy? Staying small and sticking with companies that specialize in high-tech defense applications--in other words, those firms that focus on information rather than ammunition. "There's a clear opportunity for investors in that second tier of companies," says Anita Antenucci of Quarterdeck Investment Partners, a defense-industry investment bank based in Washington, D.C. With that in mind, we went on an inspection tour of the ranks of defense companies and came up with three solid picks.

DRS Technologies (DRS, $17): This tiny Parsippany, N.J., company is one of a handful of rapidly growing, tech-oriented outfits looking to capitalize on businesses the big guys can't or don't address. DRS makes components for guided missiles and infrared vision devices like night goggles, and it just won a $17 million subcontract from Raytheon to produce targeting technology for the Army's new Javelin antitank weapon, typical of the highly mobile arms of the future. On top of that, DRS makes data-storage equipment and flight-data recorders for military and search-and-rescue aircraft. "They're a great example of a new group of merchant suppliers that have many strong niches, not just one," says Antenucci.

On the commercial side, DRS has developed a product that tracks and compensates for rapid eye movement during corrective-vision laser eye surgery. Meanwhile, it has sold off its nonessential businesses, made some well-timed acquisitions, and still managed to downsize its debt. The strategy has paid off. DRS has doubled in price over the past 12 months and still trades at a P/E of just 18--an attractive multiple considering its projected earnings growth rate of 15%.

CACI International (CACI, $26): It's not as sexy as guns and ammo, but one good way to invest in rising defense spending is to tap into the $40-billion-a-year federal budget for information technology. With about 50% of its business coming from defense contracts, CACI is in a prime position to benefit from rising military budgets. The Arlington, Va., company is another small cap, with a market valuation of just $300 million, but it specializes in "information assurance"--protecting battlefield communications systems with firewall technology. "As the military becomes more dependent on computer systems, this business is becoming a bigger priority," says analyst William Loomis of Legg Mason Wood Walker. In January, CACI landed a $100-million-per-year contract to provide operations support to a new Army intelligence program.

Two caveats: CACI could be hurt by a prolonged slowdown in IT spending (although it hasn't affected the company yet). Also, CACI manages the ground system for troubled satellite phone company Global Star, which owes CACI some rather hefty back payments. However, the long-term potential of the company, combined with a strong management team, still makes CACI an attractive play right now.

Raytheon (RTNb, $33): Yes, we advised sticking to small companies, but with a shift toward high tech, it only makes sense to consider the world's largest defense electronics firm. Raytheon's 17% gain in share price last year was respectable but still lagged behind that of its peers. The reason? Cash flow problems in its commercial-jet business have led to serious earnings swings. In the past few months, however, Raytheon has not only taken steps to stabilize its troubled cash flow but also managed to reduce its debt (down from $9.9 billion to $9.1 billion in the most recent quarter). Analysts see a significant upside. "They haven't yet established an impressive earnings track record, but I like the management, and they're on an identified path to improvement," says analyst Christopher Mecray of Deutsche Banc Alex. Brown.

It's hard to argue with Raytheon's strategic position. It designs guidance systems for missiles and air defense, tactical communications gear, and airborne surveillance equipment--exactly the stuff that will be in high demand in the revamped military. Plus it has a big stake in the missile defense program. The company recently estimated its potential revenue gain from that program alone at up to $5.3 billion over the next five years. And although the final format of the system--surface-based interceptor missiles vs. an air- or space-based laser device--has not been determined, Raytheon is almost certain to be involved. As the world's largest missile manufacturer, it has already locked up the contract to make the "kill vehicles" that will knock enemy weapons out of the sky and designed a key radar system for acquiring targets. If all goes according to plan, in a few years Raytheon could be blowing its competitors away as well.

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