It’s a Small Cap World (for Now) – Russell 2000 Index Up nearly 18 Percent for Year

Graphic courtesy of Russell Investments

 

The stock market finally “took a breather” on Monday of this week, as the Wall Street Journal characterized it. The resilient bull market of 2013 has seen only four sessions in May that had a decline in the Standard & Poor’s 500-stock index and Monday was one of them. This year’s bull market rally has recently been across the board–Asian markets have been up, European markets turned up, and market watchers are anxiously waiting for tomorrow, Wednesday, May 22, when Federal Reserve Chairman Ben Bernanke is scheduled to testify to Congress and the Fed releases the minutes from its last public policy-setting meeting. Will Bernanke offer up any clues about his next steps?

Most importantly for Smallcap World, the Russell 2000 index, which tracks the performance of smallcap U.S. equities, climbed above the 1,000 level for the first time Monday, a metric that MarketWatch considers “psychologically important” for smallcap stocks. As of Monday morning, May 20, the Russell 2000 was up 17.9 percent for the year-to-date, according to FactSet (The Associated Press reported the Russell 2000 up 17.5 percent for the year).

The conventional wisdom is that small caps stock are doing well because they are more U.S. focused than the large caps, which tend to be multi-national. And the U.S. economy is recovering as opposed to other economies around the world. But many large caps are doing well, too,

You don’t have to look far to find small cap stocks at 52-week highs, even “all time highs.” Of course the question always is, how much higher can these stocks go? Buy now or wait for the correction that so many experts have been predicting is right around the corner for months now?

We’ve selected a few stocks we know are at all-time or 52-week highs, and others we’ve covered lately that seem to be on the upswing.

Calabasas, CA-based National Technical Systems * (Nasdaq: NTSC, http://www.nts.com/) is a relatively unknown smallcap stock but also the world’s largest independent engineering services and testing company. It’s biggest markets include aerospace and defense, but also works in the automotive and telecommunications markets, among others. NTSC closed at an all-time high of $13.09, up 94 cents on May 21, with a market cap now of about $150 million. NTSC is lightly traded, only about 7,500 shares a day, although that is trending up. 

Northville, MI-based Gentherm * Incorporated (Nasdaq: THRM, http://www.gentherm.com/) is a global developer and marketer of thermal management technologies for a broad range of heating and cooling and temperature control technologies. Best known for its Climate Control Seat systems that actively heat and cool seats in more than 50 vehicles made by the world’s leading automobile manufacturers, Gentherm (formerly called Amerigon) has branched out into heated and cooled bedding systems, cupholders, storage bins and office chairs. THRM also reached a 52-week high of more than $18 this week, then closed May 20 at $17.78, down 33 cents for the day. Its market cap is now $594 million. As recently as last July THRM was trading at just above $10.

We recently featured Cincinnati-based LSI Industries (Nasdaq: LYTS, http://www.lsi-industries.com/) , a company that offers a different take on an LED lighting company. LYTS creates LED video screens and LED specialty lighting for sports stadiums and arenas, digital billboards and entertainment companies. It closed April 29 at $7.09 with a market cap of $170 million. LYTS closed May 21 at $8, up 1 cent for the day, with a market cap now of $192 million.

Analysts at CRT Capital recently upgraded Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/), a company that builds and sells single-family and multiple-family homes in 16 states in the U.S., to a “Buy” with a $29 price target. BZH also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. As recently as last Sept. 14 BZH was trading for $3.77. It closed March 20 at $16.86 with a market cap of $410 million. BZH closed May 21 at $21.75, down 98 cents for the day. Its market cap is now $538 million.

San Jose, CA-based SunPower Corp. (Nasdaq: SPWR, http://www.sunpowercorp.com/), like many solar stocks, have been on the upswing lately. SPWR closed May 8 at $15.36, down 6 cents for the day, with a market cap of $1.8 billion. It closed May 21 at $21, down $1.70 for the day but got up to $23.76 just last week. Its 52-week trading range is now $3.71-$23.76.

Fremont, CA-based Procera Networks (Nasdaq: PKT, http://www.proceranetworks.com/) works with mobile and broadband network operators providing intelligent policy enforcement solutions for managing private networks. PKT’s products are sold under the PacketLogic brand name to more than 600 customers in North America, Europe and Asia. PKT’s 52-week trading range is $10.12-$25.99. At mid-day May 2 it was trading at $11.22, with a market cap of $229 million. At market close May 21 PKT was trading at $13.89, down 3 cents for the day, with a market cap of $282 million.

* Denotes client of Allen & Caron Inc., publisher of this blog.

Buzz Zaino: Royce Fund Manager Sees Strong Growth Upside for 2013, Boosted by Housing, Transportation, IT Spending

ZainoB_gBoniface A. (“Buzz”) Zaino is a portfolio manager advising several of the high-profile Royce Funds, to wit, the Royce Opportunity Fund and associated funds. By any measure a veteran of the industry, Buzz has more than 40 years of experience in the financial services industry, the last 14 with Royce. I first met him when he was managing the Value Added Funds for Trust Company of the West more than 20 years ago, but prior to that he was president of the Lehman Capital Fund and a principal of the “original” Lehman Brothers. He went to school at Fordham, and took his MBA from Columbia. In 44 years, Buzz has seen enough economic cycles to offer an MBA from the University of Zaino.

Buzz agreed to talk about his 2013 outlook from his home in Aspen which, like much of the US snow belt, has seen little of the white stuff so far this year.

JA: It seems generally agreed that the US economy is growing at a slower pace than it has coming out of previous recessionary periods. What is your outlook for 2013? Will the economy continue to grow, and if so, will it grow at the same rate, faster or slower?

BZ: The reason that the US economy has had a slow lift-off has been that coming out of recessions in the past, the Fed has lowered interest rates, and people took that opportunity to buy houses and cars. This recession was different, because the banks were not giving out money, because money was scarcer and because bank lending standards were significantly more stringent. So there was a hiatus and it took a lot longer for the economy to recover. The recovery finally started this year, 2012, and it is finally beginning to give a boost to the economy, especially as construction gets going again. That boost is going to continue, and it will help us accelerate in 2013. But the recovery was complicated by the fact that Europe went into recession. American companies tend to be worldwide in scope, and caution at the top levels helped bring inventory levels down due to the European recession. That meant that capital spending was also muted. I think that capital spending is also constrained in anticipation of the budget settlement that is still out in the future. A “normal” recovery was delayed until 2012, and then delayed again by the European recession. But those delays now give us the opportunity to accelerate as 2013 progresses.

JA: Will we get a budget?

BZ: Sooner or later, yes. We will get a budget deal out of Congress. Once we have that deal defined, we can go forward from there. That will be a positive, and will be on top of the acceleration we can expect from normal factors like housing and auto sales. We could get a nice surprise in 2013. But we’re cautious about January.

JA: Why is that?

BZ: Most managers will make their January decisions based on their December orderbooks, and we don’t think the December orderbooks will be strong enough to give them confidence, but as we go into February and March, a lot of the inventory build-up will have started to occur, so the orderbooks will look better. And the trade between China and the US is expanding again, after a period of slower growth. We think that could have an increasing effect, especially after the Lunar New Year. By the end of the first quarter, growth could be looking quite good.

JA: The harsh talk by Washington DC and Beijing won’t slow down that growth?

BZ: The China-US trade is too big a market for both sides, and politics will not interfere with it. Certainly the Chinese government’s expansion plans are not going to be held back. There are Chinese hotel companies looking for hotel properties in the US – to build or to buy. Very smart people, and I don’t think either side is going to let politics inhibit our trade relationships. Nothing is going to come of the yelling.

JA: Will the growth rate be higher going into the second quarter then?

BZ: I think we could have a weak-ish economy and market in January, like I said. Everyone will be paying higher taxes, at least with FICA deductions back in everybody’s paychecks. With orderbooks in December that may not be strong, managers and consumers could still have their hands in their pockets. If we have a warm winter like we had last year, we could have more construction starts. If we have a cold, snowy winter, those starts could be delayed, and the weak period could extend through January. We are looking very favorably at housing. Housing is still somewhat depressed, but the housing stock is aging — and mortgage money is more available than it was a year ago. And the automobile fleet is aging and will need to be updated, as will the commercial truck fleet.

JA: Do you think the growth rate will exceed 2%?

BZ: Yes, better than 2%, but maybe not in January. But after that it could be substantially more than 2%. Four to five percent would not be out of the ballpark, although 5% would be at the high end of probability. And the market would react to that. If the market is down – and cheap – they don’t want to buy, but if it goes up 15%, everybody wants to buy. If UPS starts to replace its fleet and buys trucks, all the others will update their fleets at the same time. It’s much cheaper to run your truck or your fleet on CNG (compressed natural gas) too. A town near Aspen has converted their entire bus fleet to CNG, and although they can fuel up at the bus barn, there are additional CNG stations being built. Boone Pickens and his group are encouraging these new CNG fueling stations. We’re surprised that trucking companies are not moving faster than they are toward natural gas. We have an investment in a building materials company and I asked them if they are considering CNG, and they said they had not looked into it, but they would. Conversions to CNG are not expensive. Ford and GM are now offering pickup trucks with CNG engines.

JA: Is there going to be a fiscal cliff solution?

BZ: Eventually. Whether or not it happens before December 31, there’s no way to tell. But the congress can pass a continuing resolution to postpone the cuts and tax increases while they work on it. Eventually this Mexican standoff will be resolved. And by the way, the fiscal cliff does not seem to be a big motivator for the American consumer. They need to replace things, and they are not overly concerned with the big picture as long as the economy seems to be getting healthier.

JA: What sectors are going to do better as the economy improves?

BZ: IT spending will pick up. There is a big pent-up need factor here, and it has been a relatively easy way to postpone expenditures for the last couple of years. Windows 8 is very much under-rated. It takes a while for people and corporations to decide to make a big change like the change to Windows 8, but it will be very good for PC companies. Corporations need to have the latest and fastest. Technology in corporate environments needs to be the newest and most capable. Areas like IT are why you can think of higher growth rates. After this hiatus, there is enough pent-up need to start a new momentum.

JA: How about healthcare IT?

BZ: I went to see my physician in New York, and he is one of the best, highest-rated doctors in his specialty. He was really annoyed that he was going to have to convert my file, which is a manila folder with all kinds of paper and bits of paper in it – to computer files. I thought, hey, this is 2012, get with the plan.

JA: How about housing? Any areas there where investors ought to be looking?

BZ: We have had a good run with housing companies, and we think that will continue. One area that may have real potential is mortgage insurance companies. It is a fairly narrow field, and some people infer from the papers that these companies may not be able to cover their losses. The reality is that housing prices could be moving up at a rate of nearly 1% per month in the near future, and as a result those liabilities would be decreasing. Mortgage applications for refinancing were up last week 47% year over year. That’s a meaningful number. Apparently not everyone is under water. Those areas that have dropped the most are improving the fastest in some cases. California is one of those.

JA: Any areas where you would be wary going forward?

BZ: Defense companies. We think there will be lots of cutbacks, lots of programs cancelled. Defense personnel contractors may do better as the armed services cut back their personnel. Company by company there may be some good bets in defense, but we believe the sector will be down.

JA: And in summary?

BZ: Other than defense, it is going to be a broad-based recovery. If we have a growing, recovering economy, interest rates would rise, and inflation would rise. Commercial banks will do better. They will use their asset bases to increase lending. The moderating factor will be that regulations will add some cost, but that will not be an inhibitor for the larger banks looking to expand regionally. If I were a larger bank and wanted to expand regionally, it would be attractive to me to buy a regional bank and expand my profitability without appreciably expanding my regulatory exposure.

JA: Thanks, Buzz.

Note: Buzz prefers not to name specific companies in his portfolios. The interviewer has no investments in the sectors discussed, and does not intend to initiate such investments in the next few days or weeks.

Unmanned Aerial Vehicle (UAV) Market: It’s Taking Off

Unmanned Aerial Vehicles, or UAVs, or drones are making headlines daily, as part of military exercises or in a variety of other ways. The market for these vehicles has begun to grow and is expected to keep growing in the near future.

Shadow UAV photo courtesy of Wikipedia.org

 Market research estimates the global UAV market is now about $15 billion this year, with growth to up to $20 billion annually by 2020. Part of the reason for the growth is the FAA is opening up air space to commercial activities.

There are several high-profile, large cap companies such as Lockheed Martin and Boeing, active in this space. But so are many smallcaps, including:

Monrovia, CA-based AeroVironment, Inc. (NASDAQ:AVAV; http://www.avinc.com/) engages in the design, development, production, support, and operation of unmanned aircraft systems, and efficient energy systems for various industries and governmental agencies.  Revenue in 2012 reached $325 million with fully diluted earnings per share of $1.36, representing compound annual growth of more than 20 percent since 2010.  Its market cap is now $503 million and the 52-week trading range is $21.14-$34.28.  The stock has taken a beating lately and at the close of market July 24 was trading at $22.96, down 88 cents for the day.

Calabasas, CA-based National Technical Systems * (NASDAQ:NTSC; http://www.nts.com/) is a leading provider of testing and engineering services with the largest network of test laboratories and engineering service centers in North America and more than 50 years of experience.  It offers an end-to-end UAV service including the design and integration of a payload, help with building a POD, testing of UAVs, even flying missions.  The Company’s 52-week trading range shows it was trading for as low as $4.02 in November, but has been reaching new highs in the low $7s this month.  Its market cap is currently around $81 million. It closed July 24 at $7.12, down 1 cent on the day.

Carson, CA-based Ducommun Incorporated (NYSE:DCO; http://www.ducommun.com/) provides engineering and manufacturing services to the aerospace, defense, and other industries through a wide spectrum of electronic and structural applications.  Its capabilities include aviation and UAV sensors.  The stock is trading near the bottom of its 52-week range ($7.71-$23.54), and the market cap is around $105 million. It closed July 24 at $9.94, up 1 cent for the day.

Austin, TX-based Astrotech Corp. (NASDAQ:ASTC; http://www.astrotechcorp.com/), through its subsidiaries, has provided support for manned and unmanned launch vehicles for the last 30 years.  It is a leading provider of commercial aerospace services, and one of the first space commerce companies.  Its market cap is about $21 million and its 52-week trading range is $0.50-$1.34. It closed July 24 at $1,11, down 3 cents for the day.

Edgewood, NY-based CPI Aerostructures Inc. (NYSE:CVU; http://www.cpiaero.com/) is engaged in the contract production of structural aircraft parts principally for leading the U.S. Air Force and other branches of the U.S. armed forces.  As a subcontractor to leading defense prime contractors, the company delivers various pods, and modular and structural assemblies for military aircraft.  The Company’s 52-week trading range is $8.78-$16.42, and the market cap is currently about $75 million. It closed July 24 at $10.69, down 11 cents on the day.

Dulles, VA-based Orbital Sciences Corp. (NYSE:ORB; http://www.orbital.com/) develops and manufactures small- and medium-class rockets and space systems for commercial, military and civil government customers.  The company`s primary products are satellites and launch vehicles, including low-Earth orbit, geosynchronous-Earth orbit and planetary spacecraft for communications, remote sensing, scientific and defense missions; human-rated space systems for Earth-orbit, lunar and other missions; ground- and air-launched rockets that deliver satellites into orbit; and missile defense systems that are used as interceptor and target vehicles.  The market cap is currently about $739 million and its 52-week trading range is $10.59 to $18.48. It closed July 24 at $12.53, down 17 cents for the day.

* Denotes client of Allen & Caron, Inc., publisher of this blog

Boom in Gun Sales Tied to Economy, NRA, and Women

Courtesy of womenshooters.com

Call it a sign of the times, the economy or the power of the NRA. But gun sales are surging. And it’s due in some substantial part to the fact that women are buying more and more of them, according to CNBC (http://www.cnbc.com/id/47032016). So much so that gun retailers and gun ranges are starting to hold “Ladies Nights” and include pink targets to take away the intimidation factor for women, the story notes.

Today, nearly 47 more women are shooting guns than a decade ago and a 2011 Gallup poll found that 23 percent of women in America now own at least one gun. A Tulsa, OK gun club says enrollment is up 400 percent in a “conceal-carry class” for women, according to the story.

Of course the story sights other factors in the growth of gun sales. The fear of President Obama winning another term and then pushing for gun control, and people just feeling unsafe, which may be tied to the economy.

Whatever the reason, the surge in gun sales has led to a surge in valuations of gun manufacturers, particularly since the start of 2012. That may be good news for smallcap investors, because some of the bigger gun names are owned by smallcap companies.

Southport, CT-based Sturm, Ruger & C0. (NYSE: RGR, http://www.ruger-firearms.com) has been manufacturing and selling firearms under the Ruger name in the U.S. and through distributorships overseas since 1948. That includes rifles, shotguns, pistols, revolvers and related products. RGR has had a good three-month run: Back in late January the stock was as low as $36.59. On April 18 it closed at $51.46, up $1.44 (up almost 3 percent) on the day. Its market cap is $984 million and 52-week range is $18.65-$53.29.

Springfield, MA-based Smith & Wesson Holding Corp. (Nasdaq: SWHC, http://www.smith-wesson.com) was founded way back in 1852. As you might expect from a holding company, it sells more than firearms (ncluding handguns and rifles) and firearm-related accessories. It sells “perimeter security solutions” including guard booths, inspection systems, mobile barriers, signs and systems, plus much more. On April 12 SWHC unveiled a new polymer pistol, the M&P Shield, “a high performance option” to their line of firearms. SWHC stock has a similar three-month chart as RGR, showing a low of $4.69 back on Jan. 17, then rising to close at $8.05 April 18. Market cap is $522 million and 52-week range is $2.29-$8.60.

Out of our smallcap focus with a market cap of $2.67 billion is Sidney, NE-based Cabelas Inc. (NYSE: CAB, http://www.cabelas.com) has a broader range of hunting, fishing, camping and outdoor-related merchandise. But they do offer Smith & Wesson handguns, as well as Walther pistols. CAB has also enjoyed the run-up in valuation brought on by the recent surge in gun sales. Back in January, CAB was trading for less than $25. It closed April 18 at $39.15, up 2 cents on the day.

Business Services Are Enablers of Growth, Offer Value Opportunities

As the US economy begins to nose upward, and economic indicators seem to be showing more strength (unemployment at 8.3%, GDP growth speeding up), it is a good time to look at those companies whose job it is to enable businesses to grow, to bring new products to market, or to make their operations more profitable.  As a group, these companies are frequently referred to as Business Services, and they cover a long stretch of waterfront.  What they share is that they act as part of the infrastructure that businesses can call upon to help them move forward.  We will not be considering any accountancies — but they are an example of a Business Service.

Lightning simulation testing of a nosecone, courtesy NTSC

Philadelphia-based CDI Corp (NYSE: CDI; http://www.cdicorp.com/), for instance, provides engineering and information technology project outsourcing solutions and professional staffing services  in the US, UK and Canada.  CDI’s service is a wrap-around capability, offering business startup services (especially to medical-industry startups), a very broad range of engineering & design, head-hunting and personnel systems.  This sort of company allows its clients to “stick to their knitting” instead of worrying about administrative burdens.  For the third quarter of 2011 they reported revenues of $272 million, up nearly 10% from the previous year, with $0.15 per share of earnings, and a cash dividend of $0.13 per share.  Shares closed on Friday at $14.97 vs a 52-week high of $20.34, with below-average daily volume of about 40,000 and an overall market cap of about $287 million.  Because they are difficult to classify, these companies, in spite of good growth and good results, frequently suffer from neglect, and may well offer a deep value opportunity as a result.

Wilmington MA-based UniFirst Corp (NYSE: UNF; http://www.unifirst.com/) is in the uniform business, providing protective wear, flame resistant clothing, laboratory gear, coveralls — and cleaning services, including decontamination services for various toxic substances.  They also supply restroom supplies and first-aid cabinets to a dizzying breadth of customer industries.  Founded in 1936 during a deep economic downturn, UNF reported strong rebound revenue growth of 14.6% in their fiscal first quarter ended Nov 26, 2011, with $313 million and $1.30 per share in earnings.  The Q1 dividend is $0.0375 per share.  CEO Ron Croatti was a hirsute laborer in a recent episode of CBS’s “Undercover Boss,” and you can see the whole episode on the UNF website.  Shares are selling for about $61.61, near the top of its 1-year range, and average volume is about 58,000 shares — again, lower than one might expect, given how well the company is performing.  Market cap is about $1.2 billion.

Calabasas CA-based National Technical Systems Inc* (Nasdaq: NTSC; http://www.nts.com/) is an outsource for engineering services and testing products to find out how long they last, what makes them fail, how rugged they are, etc.  They do a lot of government and aerospace work (testing flight instruments and landing gear, for instance), but also work for the auto industry, telcom companies, energy suppliers and makers of consumer products.  With more than 50 years of experience, NTSC also helps clients with engineering expertise and supply-chain management, and certifies ISO standards compliance.  Even so, it is probably the only pure-play testing lab listed on a major US exchange, and it languishes as a result because they are a one-of-a-kind company.  For the first nine months of their fiscal year ended January 31, 2012, NTSC revenues increased to $115 million, up 6.2% over the previous year, and earnings from continuing ops were $0.03 per share.  A substantial book loss from closing a Canadian facility led to a net loss, vs previous-year “normal” earnings of $0.10 per share.  Like CDI and UNF, NTSC is largely invisible to the public, and its stock sells for about $5.00 vs a 52-week range of $4.02 – $8.00.  Daily volume is low, at less than 6,000 shares, but the float is small too, with insiders as major holders. Market cap is about $57 million, about a third of annual revenue, in spite of a robust base business.  Look at this video if you want to be impressed: http://www.nts.com/resourcecenter/multimedia#videodialog_10.

NYC-based Volt Information Sciences Inc (OTC: VISI.PK; http://www.volt.com/) is a sizeable company, with 4th-quarter revenues in the range of $473 million, up from the previous year.  They hit a speed bump and are having to restate financial results for 2008 and previous years, and have not reported audited results for 2009 or more recent periods.  There is a big ongoing restatement assignment for their accountants, but they have been giving quarterly “estimates” of what is going on.  They operate globally and their clients are mostly Fortune 100-type companies.  They provide outsourced IT, engineering and workforce staffing for projects or fast-growth companies and divisions.  They also provide IT services, and a lot of engineering and construction services, as well as infrastructure services like operator services, directory printing (like yellow pages), etc.  Clearly difficult to categorize as well as in a ditch due to accounting difficulties.  Even so, cash balances seem to be improving, which may be a good sign, and VISI shares are selling for $6.99 vs a 52-week high of $10.80.  Daily volume is paltry (16,000 shares), and market cap is $146 million, less than 10% of annual revenues, which may point to a deep value opportunity for investors with patience and healthy blood pressure levels.

Finally, look at Minnetonka MN-based G&K Services Inc (Nasdaq: GKSR; http://www.gkservices.com/).  Also in the uniform business, GKSR has  additional product lines for the workplace, including special-purpose floor coverings, such as traction mats and anti-fatigue flooring.  They also provide maintenance products and linens.  Not a very exciting business compared to biotechs with a cure for cancer, but GKSR has been doing what they’re doing since 1902, and they are scooting along with 7.4% growth for their second fiscal quarter ended December 31, 2011, reporting revenues of $217 million and EPS of $0.51 per share.  Last week they declared a quarterly dividend of $0.13 per share.  Not shabby, especially with the stock selling for $31.20 vs a year-high of $36.54 on volume of about 83,000 shares.  Market cap, in spite of great financial performance, is only $587 million, about 50% of revenue, and that’s with a dividend yield of 1.7%.

Please do your own research.  We do not make recommendations; we just write about interesting companies.

* NTSC is a client of Allen & Caron, the publisher of this blog.  We do not hold or trade NTSC shares.

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