Fortify the gates

The Markets have been a funk. Blue chips are getting hit hard, especially the financial sector. Lets forget about the financial sector completely for a moment. Now is a good time to look into defense/security and energy.

Looking at Defense; The defense budget -- excluding supplemental funding used mainly for the Iraq war -- should grow about 8% over the next three years, according to projections by JSA Research, an independent defense sector research group in Newport, R.I.

A good place to start is with companies that make armour plating for vehicles. Retrofitting is very expensive to purhcase, however, the asset allocation is not very high from the perspective of the company. A good choice here is Alcoa, Inc.. Alcoa was recently awarded a $31.7 million contract to supply aluminum armor plate for the Army's new armored vehicle program. Alcoa offers diversification along with a dividend, plus they accept direct investment, all of which lead us to give them a BUY rating.


Another good pick is,Northrop Grumman. This defense contractor has a hand in everything from military electronics and information technology to ships, avionics and unmanned aerial vehicles. But worries about cutbacks in spending on ships have some investors concerned, putting pressure on Northrops valuation. Fears of significant contraction in shipbuilding are overblown, maintains Pollack. Troy Lahr, defense sector analyst at Stifel Nicolaus, projects Northrup will produce $1.6 billion in free cash flow in 2006, which will support an ongoing share buyback program.
United Industrial also receives our BUY pick of the day. They too make unmanned aerial vehicles, and they are spending a great deal of money on R&D; which is OK because they are expecting 8% sales growth.

Applied Signal Technology, which has been in the news over the past few months due to their close relationship with the NSA and Pentagon. They operate with near impunity in today's USA. This company makes equipment used to analyze digital signals. That could mean eavesdropping on cell phone conversations, identifying the electromagnetic signature of a ship, or analyzing radar images.

When it comes to picking up terrorist "chatter" or Americans' cell phone calls, these are the people that the US Government calls. As with many intelligence-related companies, predicting future earning or sales numbers is often very difficult. The reason is simple, much of what their new products are secret, along with the specifics on contracts awarded. Still, AST has a good record of selling to the NSA, CIA, MI6 and the like.

As long as the perceived risk of domestic and international terrorism persist, the US and other governments are not likely to take a slice form the defense pie; now lets go spy on some bad guys.