In terms of defense spending, the Obama administration doesn’t look much different than its Republican predecessor. While the cuts to the over-budget F-22 fighter jet made the headlines, the House of Representatives rejected most of the slew of Democratic proposals for other significant spending cuts and recently passed a $636 billion defense spending bill. Even if the bill gets altered in the coming months, the House vote is a pretty good indication that smallcap companies which rely on government defense funds should find business proceeding as usual.
Many of these are lightly traded, relatively unknown companies , which are trading well-off their highs. If indeed they will benefit from the Pentagon spending bill, their stocks haven’t reflected it yet. Perhaps that means there’s some value for investors in a number of defense-focused smallcap companies, which can probably count on a reliable stream of funding for their work and those of their partners.
Michel Field, NY-based Frequency Electronics (Nasdaq: FEIM), for instance, creates high-technology timing and synchronization communications products imbedded in moving platforms used by the U.S. military. FEIM is trading Monday, August 10 at $3.26, down from $5.72 it hit last August. Hudson, NH-based Micronetics (Nasdaq: NOIZ), which makes microwave and radio frequency (RF) components used in various wireless, defense and aerospace products, is trading at $3.17, way off its high of $7.90. Eatontown, NJ-based EMRISE * (NYSE Arca: ERI) develops a range of products for the US and European defense industries including products used in terrorist interdiction and force protection for the US military. Among these products are RF devices used in radio controlled improvised explosive device (RCIED) jamming systems to prevent the detonation of roadside bombs. EMRISE traded at $1.35, off its 2009 high of $1.76. And Lancaster, PA-based Herley Industries (Nasdaq: HRLY), which designs, develops and manufactures microwave technology for defense and aerospace, among other markets, seems to be on the upswing after dropping down toward $9 last May. It’s jumped to more than $13.40, but is still far off last summer’s 52-week high of $20.35.
A closer look at how the military allocates the $636 billion may provide a key to picking out some defense oreinted smallcap winners. A company like Calabasas, CA-based National Technical Systems (Nasdaq: NTSC), whose products include engineering and testing services, relies on defense and aerospace markets for about 50 percent of its revenues. Since NTS engineering and testing and services are needed early in the product development cycle, military R&D spending is particularly relevant and that’s projected to increase by 4 percent this year, according to a recent company filing. NTSC is trading at $4.45, off its 52-week high of $5.69.
*client of Allen & Caron, publisher of this blog