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Small-Cap Defense Stocks The Fate of Small-Cap Defense Stocks
Voters in the U.S. made their feelings known about the Iraq War and seemingly swept aside as much Republican influence as they could last week. Political pundits didn't see this coming. Equity analysts were shocked, too. And markets always love to react to changes in expectations... ****************************** How a "No-Talent" Trader Turned $400 Into $200 Million The best professionals don't spent hours -- or weeks -- analyzing the new moves of the market. They act. And act fast. It's what separates the winners from the rest of the pack. And you can actually learn this winning "instinct"...it's not something you need to be born with. Read the special report to learn more. But HURRY -- you have only 11 days before this offer expires... ****************************** In March 2006, the Department of Defense published details of the defense budget President Bush took to Congress. It projected a U.S. defense budget for 2007 about $28.8 billion less than the one for this year. It also estimated that we would not see defense spending on par with 2005 levels for at least the next three years:
With a lull in budget growth already expected even before last week's Democratic sweeps, defense stocks would seem like a place you would not want to have money. In fact, over the last week, that sector has seen some bloodshed -- with the minnows of the group taking it the worst. Our scan of performance in the aerospace and defense sector over the last week shows that eight of the top 10 losers since the November 7 elections have been small-cap and micro-cap names:
VirTra Systems, a manufacturer of military simulation systems, took the biggest hit, dropping over 23% in the seven-day period. Moller International, down 11%, designs and builds vertical take-off and landing (VTOL) airplanes. These are similar in concept to the Hawker Harrier Jump Jets the British military has used for decades. Down almost 9% was United Industrial Corporation -- makers of many defense-related products, including systems for drone aircraft. ****************************** These Gold and Coal Stocks Are Set to Outpace the Market 19-Fold In the Next 6 Months... Both share the same secret & powerful investment strategy that has already made investors 19 times more money than the Russell 2000 in the last six months. Only 87 copies of this exclusive report are available at this time. Secure your personal copy in the next 3 minutes before they run out... ****************************** The major defense companies, like Lockheed Martin and Northrop Grumman, held up well to the Democratic win. The reason is most likely because the 2007 defense budget will still be the largest portion of the total Federal budget. Another major reason is that no political party would want to be seen denying troops of their necessities while they are on the ground in a combat theater. So until the Democrats engineer a troop withdraw, adequate funding should remain in place. Not all defense stocks took this shift in power badly, though:
One of the big winners of the week was small-cap Hi-Shear Technology (HSR: AMEX). This is a diversified company that makes many aeronautical components, but one of the more interesting military products it makes is laser ordnance for the U.S. Army. It was up almost 26% on the week. Military aircraft engine-part maker Kreisler Manufacturing (KRSL: NASDAQ) was up over 8%. This micro-cap announced huge sales and profit increases for their September quarter. So the big question is: Are defense stocks a good play these days or should investors now stay away? The answer: You need to be selective, as always... Let me show you. Take HEICO (HEI: NYSE), for example. It's a $1 billion, small-cap aerospace and defense company that provides engine parts and services for commercial aircraft, and an extensive suite of test systems for military applications. And with the specter of a falling defense budget in the near term, the company is actually prospering. On August 30, the company reported 3Q06 results, which included record net sales and record operating income. This was the sixth consecutive quarter in which they did so. And in the last six months, its stock has gone up 25%. Insiders have been making many purchases recently of HEI shares. Four directors and the chairman of the board made purchases at the end of August -- many of which represented substantial percentage increases to their HEI holdings. HEICO's debt-to-total capital is a very attractive 12%. However, the company has been making a lot of acquisitions, which has been eating into its ability to produce free cash flow. The market, though, is looking beyond this, and sees the cash-generating ability of this business when it does stop its growth-through-acquisition phase. Unfortunately for us, HEICO's strong performances over the last several years have attached a premium to its shares -- and the stock is now pretty pricey. This is a stock, though, that I would consider recommending if its price pulls back. Make this "one to watch." In the meantime, we've found a similar company to HEICO -- a company posting record results and gaining a lot of recognition in the defense arena. It's already rocketed to huge gains this year, but a careful examination is starting to reveal that this could be only the first leg of its assent. The next issue of the Small-Cap Strategy Report will focus on this defense play, and a couple of ways to play it. Make sure you get the latest issue of SCSR by signing up here. Until next time, |
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Craig has spent the last ten years entrenched in the investment industry and doing what he loves best: performing financial research on scores of companies and writing about compelling investments... <click here for full bio> |
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