Defense stocks getting an Iranian boost

An F-35 fighter flying over the Pacific Ocean this week during in-flight refueling tests.
Jeff Daniels | CNBC
An F-35 fighter flying over the Pacific Ocean this week during in-flight refueling tests.

A story just coming out in the Israeli news media today shows just how much of an impact the now inevitable Iran nuclear deal is having on the entire Middle East... and the just-as-big impact it's having on the financial world as well.

The story is fascinating, but simple. The Israelis have come up with a way to reprogram and refit the Lockheed-Martin F-35 Stealth strike fighter to effectively double its range without detection. In case you're still nonplussed by this news, you should know the name for the special Israeli edition of the new F-35 is the "Adir," which is Hebrew for "Awesome."

And it could be awesome indeed. Defense News says this new jet will change the equation in response to the new S300 anti-aircraft missiles the Russians are about to send to Iran. An Israeli Air Force officer says it simply allows you to, "hit the enemy without him being able to stop you." The first pair of F-35 "Awesomes" are slated to arrive in Israel in late 2016.

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This may be the coolest, but it's certainly not the only, story coming from the front lines of the biggest military buildup in Middle East history. It's all because Iran's neighbors are generally convinced the impending deal will indeed give the Ayatollahs a nuclear weapon within the next decade and the massive cash haul the Ayatollahs get for signing the deal will result in a major conventional military buildup by Iran itself. The arms race picked up in 2013 in response to Iran's increased involvement in Syria. And defense expert IHS Jane's expects the spending to continue to rise despite the drop in oil prices and the amount of available cash.

Much of the world's attention is focused on how Israel is responding, but it's the Saudis who started really opening their wallets a year ago to counter the expected results of the Iran deal. In fact, the Saudis recently became the world's biggest importers of arms with $8.6 billion spent in 2014 alone. That's more money spent on arms last year than all the Western European countries combined. And the Saudis are being generous, as the government there is also lending and providing other upfront funding to neighboring Arab countries like Egypt, Jordan and the United Arab Emirates. Most of that money is being spent now to buy arms from Russia.

So what does this mean for stocks? Russian military manufacturers aren't publicly traded, but the U.S. corporations that make the weapons made to counter or augment Russian arms are. And the stocks of the pure defense plays in the U.S. market are showing good strength during this weapons buildup. Lockheed-Martin shares up about 14.5% from a year ago today. Northrop Grumman is up 20% since last September. Raytheon's been the laggard on this score, but it's still up about 2% from 12 months ago.

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Look for more movement and higher revenues for those companies as the arms race continues. The competition will be fierce. What Lockheed-Martin is doing by working with the new Israeli specs for the F-35 is showing the rest of its potential customers that it's ready to help them respond to the new Iranian threat. The Saudis aren't showing any signs of slowing down the spending, and there's no reason why U.S. companies can't benefit just as much as the Russians.

So if you're looking to ride out the current tumult in the markets with some defensive investments, the best way to be defensive might be to buy the actual defense stocks.

Ain't war Hell?

Commentary by Jake Novak, supervising producer of "Power Lunch." Follow him on Twitter @jakejakeny.