WASHINGTON, D.C. – With the election of Barack Obama, uncertainty hangs over U.S. defense companies. Michael Lewis, equity analyst at BB&T Capital Markets, isn’t ready to make a call on how things will shape up for this sector in the Obama administration’s first six months.

“It’s very difficult to determine until we actually begin to see directional changes in funding or contracts actually starting to be pulled to the side,” he says. “Longer term, I do think there will be some type of sea change with regard to how dollars are spent.”

Fittingly, U.S. aerospace and defense stocks didn’t dodge Wednesday’s post-election market drop. The S&P 500’s aerospace and defense constituents fell 5% yesterday, in line with the broader index’s decline.

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The last 10 years have been quite a ride for shareholders in Israel’s NICE Systems, a developer of data-analysis technology for use in security and customer service. The Nasdaq-listed stock jumped to a tech-boom high of $50 in March 2000, only to sink to $3 per share a year and a half later. Since then, it has gradually recovered and now trades at $31.

Equity analyst Daniel Ives of Arlington, Va.’s Friedman, Billings, Ramsey & Co., believes NICE Systems’ (nasdaq: NICE) stock will continue to climb back toward its 2000 peak.

“They’re a well-run company,” he says. “The stock is undervalued based on growth.” (Note: Friedman, Billings, Ramsey makes a market in NICE Systems shares but does no banking work for the company).

One reason for his optimism: the potential in NICE’s security and surveillance business, which accounted for 24% of its $517 million in sales for the year ended December 2007. Ives thinks NICE can build on its big wins with government customers like the Federal Aviation Administration and the city of New York.

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Washington D.C. – U.S. Air Force Captain turned stock analyst, Raymond James’ Brian Gesuale keeps tabs on 14 companies selling technology or technology services to government agencies–military and civilian. One issue he’s not too concerned about these days: McCain versus Obama.

“The general message we’re putting out there is, ‘Don’t be afraid of politics and the election this year,’ ” he says.

That advice isn’t for every defense investor, however. Gesuale thinks stocks of defense giants like Lockheed Martin (nyse: LMT – news – people ) or Northrop Grumman (nyse: NOC – news – people ), as well as companies who sell war “consumables” (ammunition and so on), could well get knocked around by electoral outcomes.

In contrast, Gesuale suggests the stocks he covers–small- and mid-cap technology concerns–likely stand only to benefit from a changing of the political guard. One reason is that these smaller players tend to suffer disproportionately from budget uncertainties. When Congress and the Bush administration battle over military spending priorities, as they did over supplemental war funding earlier this summer, the odds rise that money for new technology will get squeezed or cut.

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Washington, D.C. – Over the past 12 months, valuations have plunged in the aerospace and defense sector. Last July, for example, U.S. aerospace and defense stocks traded at an average 23 times trailing-12-month earnings, according to an aggregate compiled by FactSet Research Systems. The average price-to-earnings ratio presently: 13.

Despite the compression in the average earnings multiple, it is not easy to be bullish here, as business has turned nasty for commercial aerospace customers. Tuesday, the Air Transport Association, the airlines’ trade group, announced that first-quarter expenses for airlines grew at the fastest pace since 1980. The biggest culprit: a 51% year-over-year increase in the average price of aviation fuel.

Beyond pure contrarianism, do bargain hunters have any reason to jump into aerospace and defense? One may be consolidation. As some investors retreat from these companies, corporate deal makers remain interested, according to a report released Monday by PricewaterhouseCoopers. The accounting firm says the sector saw $31 billion worth of aerospace and defense acquisition activity worldwide in 2007, the most since a peak of $46 billion in 2000, and forecasts significant merger and acquisition activity for the next one to two years.

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With rising energy prices threatening commercial aviation, aerospace and defense stocks haven’t fared well in the global equities downturn. Year-to-date, according to an index tallied by FactSet Research Systems, the stocks of aerospace and defense companies worldwide have dropped 19% in dollar terms, versus an aggregate decline of 14% across all sectors globally.

At least one aerospace and defense stock, however, has bucked the year-to-date trend: Saab, the Swedish maker of military aircraft, aviation components and command and control systems. The share price for the Stockholm-headquartered company, not to be confused with the auto brand now owned by General Motors (nyse: GM – news – people ), is up 17% so far in 2008.

Even with the uptick, Saab still looks cheap. Its Stockholm-listed shares sell for just 10 times the average analyst estimate for 2009 earnings per share. Contrast that with equivalent multiples of 12 for Lockheed Martin (nyse: LMT – news – people ) and 13 for Raytheon (nyse: RTN – news – people ). Those interested in international investing should put Saab on their radar screen.

“In this turbulent time, we believe investors will appreciate this type of company more and more,” says Mikael Laséen, a Stockholm-based analyst at Kaupthing Bank, speaking of Saab. “It is of course a political risk, but clearly you don’t have to worry about the business cycle and consumer spending that much.”

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Thirty years ago, before he jumped into securities analysis, Richard Whittington paid his dues working in the bowels of the U.S. Department of Defense and the Rand Corp. (a think tank catering mostly to the U.S. government). He ran budget analyses and worked over different Cold War scenarios, like what kind of troop levels were sufficient to block a Soviet thrust into Western Europe.

Now at JSA Research, an independent equity research boutique focused on aerospace and defense, Whittington has a worldview that remains very much informed by those Cold War days.

“There is an emerging threat,” says Whittington, 58. “China is spending an increasing sum of money on its military, including frontline aircraft.” He also points to China’s moves to secure energy supplies, a historically rich source of global conflict.

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