Defense & Homeland Security Stocks: Some Are Going Up, Up, Up

As world economies edge toward recovery while job creation remains on the sidelines in many places, one of the industry sectors that may be attracting more attention is defense and homeland security.  In a consumer-driven recovery with strong job creation, the focus may be different, but at this point the companies that stand to do business with sovereign governments are looking increasingly intriguing.  Many of those companies are multinational giants, of course, and many are controversial for one reason or another.  But there are good smallcaps too, and we’ll have a look at some of them in this article. 

As a backdrop at a time when the US is waging two hot wars, it may surprise many people to know that as a percentage of GDP, defense spending, though not at an alltime low, is far from a historic high.  Ira Machevsky provided a concise analysis and chart about 18 months ago to show graphically what that means: http://thenumbersguru.blogspot.com/2008/10/defense-spending-as-percent-of-gdp-1940.html, and the conservative think-tank, The Heritage Foundation, seems to concur: http://www.heritage.org/budgetchartbook/Defense-Spending-on-the-Decline-Despite-War-on-Terror.aspx.

Heritage Foundation Chart on Defense Spending as a Percentage of GDP

For an investor interested in the defense and homeland security sectors, the SPADE Defense Index could be helpful: http://www.spadeindex.com/components.php.  It is a capitalization-weighted index of 50 stocks in the space, but tends to be heavy on the bigger companies.  It is listed on NYSEArca as DXS. 

We never recommend stocks; we just write about interesting companies.  Please do your own diligence. 

But in terms of world hot-spots, the geographic band that runs between, say, Tripoli and Bali (not precisely, but you get the picture) is an area that is dealing with defense against insurrection and terrorism, as well as regional, ethnic and/or religious clashes that are the continuance of many decades or even centuries of conflict in some cases.  This creates a situation where defense and defense intelligence is increasingly important.  Have a look at Covington KY-based Valley Forge Composite Technologies (OTCBB: VLYF, http://www.vfct.com/).

VLYF announced on Friday that their THOR LVX imaging systems have been listed by the government of Malaysia to be used in scanning shipping containers for such contraband as explosives, narcotics and radioactive materials (http://finance.yahoo.com/news/Valley-Forge-Composite-prnews-1400008836.html?x=0&.v=1).  Considering that shipping containers worldwide are seldom checked for anything at all in spite of their super-abundance, investors may conclude that the VLYF technology has a potentially lucrative outlook.  That seemed to be the case on Friday, when the stock moved up 10% to $2.62, vs a year-low of $0.10 (there should be some corks popping somewhere) on very strong volume of more than 400,000 shares.  Market cap is about $143 million.

Also uptrending strongly is Cleveland OH-based Hawk Corp (Amex:HWK; http://www.hawkcorp.com/), which makes “friction” products (like brakes) for aircraft and various types of land vehicles, including military and heavy construction, as well as some fuel-cell components.  HWK shares closed Friday at $19.39, vs a year range of $9.31 – $20.27, for a current market cap of about $160 million on slightly puny trading of about 23,000 shares.

Or look at Edgewood NY-based CPI Aerostructures (Amex: CVU; http://www.cpiaero.com/), which makes a wide range of aircraft parts and subassemblies for the US Air Force and other part of the US military.  CVU will be presenting at the Roth Conference in Laguna Niguel next week, and enthusiasm for its shares were evident on Friday, when the stock closed up 4% at $7.16 on unusually high volume of 74,000 shares.  Their yearly range is $3.70 – $8.30, for a current market cap of about $43 million.

Also worth a peek is Eatontown NJ-based Emrise Corp* (NYSE Arca: ERI; http://www.emrise.com/), a maker and purveyor of OEM products for military, defense and other applications in electronics and communications.  Currently one has to note that there is a problem to be solved at Emrise with regard covenants on its credit line, but the company continues to receive a flow of military orders, including one announced last Thursday: http://finance.yahoo.com/news/EMRISE-Corporation-Receives-bw-3764689376.html?x=0&.v=1.  ERI shares staggered after news of the credit situation last year, and were trading at $0.61 on Friday at the close, vs a 52-week range of $0.52 – $1.70.  Volume is low, because the next big date in the credit situation is in June.  That said, revenues seem to be growing and gross profit going up.

Fairfax VA-based Argon ST (Nasdaq: STST; http://www.argonst.com/) is another interesting company that may not be on too many radar screens.  It is a jack-of-all-trades in the electronic warfare business, and we don’t have nearly enough space here to list the areas from navigation and geolocation, to threat simulation, to underwater acoustic systems.  Looks a bit like a “Company” partner, but the stock trades ok, with 50,000 shares changing hands on Friday, closing at $25.72 vs a 52-week range of $17 to $26.50, and a market cap of about $560 million.

And if you like the values offered by good cross-border companies, have a look at Brisbane, Australia-based Metal Storm (http://www.metalstorm.com), which trades on the ASX under the ticker symbol MST, and OTC in the US under the ticker MTSXY.PK.  The OTC listing is an ADR, and has been trading better than a lot of cross-border ADRs.   MTSXY has a proprietary “stacked technology” that allows projectiles to be fired from a multiple-barreled weapon (MAULtm) whose ignition has no moving parts.  The government of Canada is a recent buyer (http://finance.yahoo.com/news/Metal-Storm-to-Deliver-MAULTM-iw-618012473.html?x=0&.v=1), and Metal Storm has an office in Arlington VA within kissing range of the Pentagon.  The ADR closed Friday at $0.29 against a 52-week backdrop of $0.27 – $0.90, so there may be some room there.

*client of Allen & Caron, publisher of this blog

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