Finding Gold In A Tapped-Out Sector
July 24, 2012 by GS Early
I am GS Early, and I proudly took the helm as editor of Liberty Investor™ earlier this month.
My efforts are twofold.
The first, as the headline indicates above, is to find opportunities in sectors that have real merit but have been exploited by investors. Sometimes when there’s a land rush in a sector, everyone buys the same thing for the same reason, which means some stocks get overbought and some get overlooked. I’ll help you avoid the former and find the latter.
Second, I will search out and find “The Next Big Thing.” There is no end to writers offering to tell you about dividend paying stocks. But dividends for the sake of dividends should make up only a piece of your portfolio. Growth is a crucial component. And most stocks that offer growth and income aren’t the growth stocks I’m interested in. I want pure, full-fledged growth stocks in dynamic sectors.
Oh, and one other thing. Don’t pay attention to me.
Well, don’t pay attention to just me. Make up your own mind. Hopefully, this is a starting point — not an ending point — in your investing process. And always feel free to contact me if you have any questions or comments.
Remember: Right before the dot-com revolution went down in flames, brokers, “experts” and talking heads proclaimed that “growth is the new income” and “if the stock doesn’t have a triple-digit price-to-earnings ratio, it isn’t worth buying.” That didn’t work out so well.
Nowadays, the opposite is true. Every investor is flocking to dividends, heeding the call that this time around is different (again) and “income is the new growth.” Don’t listen to such advice. A diversified portfolio is as important as ever, and good long-term growth opportunities are crucial to a successful portfolio.
I’ve been at this a while — more than 20 years, actually. I’ve worked with the famous, the brilliant and the infamous.
The one thing I’ve learned in my time is: Don’t listen to brokers, golf buddies or friends of friends; do your own work. As one investor told me, “I learned I can lose money as well as my broker, so why should I let him do it?” Whether it’s your sister’s kid or a guy with whom you’ve worked for years, if you let him take control of your portfolio, your destiny is no longer in your hands. The last thing we want is to cede control of our money to a government, an organization or another individual.
I assume that’s why you’re reading.
Because I wrote this for the maiden issue, I wanted to talk about one of the biggest growth industries in the world — one that is not likely go away in the next century. The funny thing is that most investors have run away from this sector in terror, leaving incredible bargains and supercharged growth opportunities on the table.
Look at this chart:
That’s the spending differential in this sector between the United States and its closest peers. As a matter of fact, the United States outspends its closest 19 fellow nations combined.
Is it healthcare? Social Security? Education?
No, it’s defense.
And even with this enormous amount of spending, it represents only about 2.5 percent of per capita gross domestic product. China’s spending on defense per capita GDP is almost double that amount.
The fact is that despite the handwringing in Washington, D.C. (I was born and bred “inside the Beltway”), defense is fine.
- In early spring, the House passed a bill that essentially overrides any consequences of looming sequestration for major defense initiatives.
- Republicans have been passing defense spending budget requests that are higher than the Department of Defense has even requested.
- Foreign sales are doing very well to make up for slowing domestic spending.
Granted, there are some big shifts from a war-time military to one on stand-down. But there is great opportunity in this beaten-down sector.
And one of the best places to look is in C4ISR. That stands for Command, Control, Communications, Intelligence, Surveillance, and Reconnaissance.
You’ve heard about all the drone strikes? C4ISR. The intel that went into Osama bin Laden’s final roundup? C4ISR. The technology that keeps our troops informed and aware in theater? C4ISR.
With the amount of spending the defense sector gets, it’s the new breeding ground for commercialized technologies. A handful of decades ago, the space program was where we found technologies that could transition into the civilian marketplace. Today, that’s the new role of defense.
When it comes to robotics, imaging, materials and even clean technologies, the U.S. military is on the cutting edge. And it continues to grow its spending in this sector.
Here’s an excerpt from a recently released C4ISR report from DefenceTalk.com, a global defense, aerospace and military site:
The US recorded budget cuts in 2011, a trend which is forecast to continue going forward. Despite this, North America is expected to account for the largest share of the total global C2/C4ISR market comprising 52% over the forecast period. Asia and Europe are also expected to account for a significant portion of the total global C2/C4ISR market over the forecast period, with respective shares of 20% and 18%. This will be largely driven by the efforts of countries such as India, China, the UK and Russia to modernize their armed forces. Latin America, Middle East and Africa are forecast to account for respective shares of 6%, 2% and 2%.
Global spending on C2/C4ISR systems is expected to remain robust over the forecast period, primarily due to the increased importance of C2/C4ISR systems in modern or fourth-generation warfare.
Top C4ISR Stocks
I’ve always been a fan of second- and third-tier defense stocks because they offer the most upside potential. Either they’ll grow rapidly, or they’ll be acquired at big premiums.
But right now, many of them have been beaten down because revenues have slowed. It’s a great time to establish positions.
Without further ado, here are a handful of “New Defense” stocks to watch:
AeroVironment (AVAV): The premier maker of ultralight, unmanned aerial vehicles (UAVs). It also has a division that is one of the country’s leading makers of filling stations for electric vehicles. This combination of technologies fit into the modern military, homeland security and energy independence megatrends.
FLIR Systems (FLIR): “Forward looking infrared” is the term from which the name of this company is derived. Basically, this is one of the leading makers of optics that can see through anything. And in C4ISR — whether it’s in Yemen, over the Mexican Border, on ships or in your back 40 — if you need vision 24/7, FLIR provides the eyes.
QinetiQ (QNTQY): Pronounced “kinetic,” this U.K.-based defense firm was Ian Fleming’s inspiration for the Q character and labs in the James Bond novels. The cutting-edge defense and intelligence company has extended its reach into the U.S. market with some very powerful connections. Robotics and cybersecurity are its passport to profits on U.S. shores.
iRobot (IRBT): A pure play on robotics. Don’t be fooled by its Roomba® vacuum or other automated household devices. The value here is in the programming and its military robots that keep troops out of harm’s way. This company is a major force that has its best years ahead of it. It’s just beginning to tap the homeland security and naval/marine sectors.
Rockwell Collins (COL): In one iteration or another, this firm has been around for a long time, and it isn’t going anywhere anytime soon. It remains a key supplier of the world’s major aerospace and defense companies. It’s leading the charge now on the 21st century soldier, networking the battle space and providing crucial C4ISR systems.