My “Politics Proof” Defense-Tech Play By Michael A. Robinson

Dear Reader,

Like millions of other voters out there, and maybe you, I’m so glad the election is over.

This campaign season not only brought a tidal wave of unpleasant ads, it’s made investing for the average guy much harder. Just take a look at the charts for the market over the last several weeks. You’ll see enough jarring ups and downs to make anyone sick.

And politics are still roiling the markets. Indeed, the day after the election, the markets sold off like a ton of bricks. Investors are now worried about the impact of the impending “fiscal cliff.” That’s the tough combo of tax hikes and budget cuts set to hit us on January 1st of next year.

Unless Washington acts fast. And good luck with that. There’s so much bickering in the nation’s capital, you might wish there was some way to profit from it.

Well, there is.

I have found what I believe is today’s best “politics proof” defense-tech play.

You probably got my email this morning about it. In fact, I just told subscribers to my high-tech trading service Radical Technology Profits to buy this small-cap leader today – while it’s still selling at bargain-basement prices. And I want to offer you the same opportunity. You can click here to take advantage of it.

I look at this as a way to turn the tables on Washington…

Here’s the thing. In the post-Iraq era, the Pentagon has become home to a bunch of penny pinchers. But for my recommendation, that’s turned out to be a very good thing.

Even in the face of wholesale Defense Department budget cuts, the Pentagon is unlikely to cancel the type of contracts that this company has on its books. Two reasons:

1. This is equipment the Pentagon badly needs, including complex gear for satellite communications, spy drones, electronic warfare, surveillance systems, cyber security, jammers that blind the enemy’s radar, and ballistic missile defense, and other products that are “designed-in” to the nation’s key defense platforms; and
2. Thanks to fees written into the contracts, it would actually cost the DoD more money to cancel the awards than to just stay the course. Indeed, that’s exactly what the CEO – who I interviewed last week – was counting on that when it decided to revamp three years ago.

That’s why, as I see it, this company is sitting on a pile of “hidden” profits.
See, back in 2009, the CEO saw that a big spending shift would occur. And he took bold action.

As a result, this firm basically went “retro.” Yes, it’s still a high-tech concern, but it’s focused on legacy systems. By that, I mean older weapons platforms the DoD intends to keep in its arsenal and upgrade along the way.

Actually, this is the second time the CEO has changed the firm’s focus. When he joined the company back in 2003, it was a struggling supplier of Web infrastructure services. It was a “dot bomb” victim that had zero defense sales.

Today, roughly 70% of sales stem from U.S. defense. The rest comes from overseas defense, as well as a new area for the firm: critical infrastructure security. That includes digital security systems for items like rail stations, pipelines, and skyscrapers. Things that terrorists might like to attack so they could wreak havoc on us. No question that’s a growth market.

Just look at the numbers. The firm has a market cap of only about $250 million. But it has a pipeline of funded orders worth four times as much. We’re talking a backlog of contracts with various DOD agencies valued at over $1.1 billion – with pending bids for another $4 billion worth.

I believe they will bring in nearly every dollar of those contracts.

Investors are missing another big part of the story, too. The firm recently increased its bid pipeline about 25% to roughly $5 billion. If it just meets the peer group’s standard conversion rate, that should mean another $1.5 billion in revenue down the line.

That’s a lot of future sales and profits for a firm whose stock sells for under $5.00.

This company is still one of the best-kept secrets in the whole defense sector.

And if it hits all its milestones along the way, it’s looking at a very bright future.

Michael

Back to the Highs… Now What?

More than 75% of Greek bondholders agreed to the swap nearly assuring that the deal will go through. That good news, in combination with yesterday’s strong ADP employment report, gave investors a reason to get back up to the old highs around 1370. However, we’ve been lingering around this spot for a few weeks.

What happens next???

Unfortunately the path ahead is not crystal clear. I see 3 potential outcomes for the stock market which I will share below (from most to least likely):

1) Melt Up to New Highs: The bull market has been running strong for a few months. But really the last month has been more of a slow melt up. Where over the course of a week there may be 3 up days and 2 down. Each week’s modest gain doesn’t look like much until you pull back to the big picture and find that it indeed is a breakout out to new highs. This would have us on course for 1400 by the end of March in time to see what earnings season has in store.

2) Consolidation: We have already come a long way in a short period of time. Perhaps investors can quickly forget the recent Greek tragedy and focus in on the surprising health of the US economy. In this case, the bull run stops here and plays in a 3% range (1330 to 1370) awaiting the results of earnings season in mid-April.

3) Rage Higher: Perhaps investors can quickly dispense of the recent Greek tragedy and focus in on the surprising health of the US economy. If so, then we rush up to new highs of around 1420. Then perhaps a modest consolidation before earnings season begins.

Again, I see #1 as most likely. The next step for you is to determine which scenario you believe in and then align your portfolio accordingly.

However, I bet there are many of you who are unsure of what will happen next. And are tired of chasing the ups and downs of this market. Instead you’d rather have an investment approach that helps you top the market while still being able to sleep soundly at night (no matter what Mr. Market is doing).

Best,

Steve Reitmeister
Executive VP, Zacks Investment Research