Defense Stocks Are In Play

In Monday’s Goldman Guide we mentioned possibly looking at defense stocks as a short-term play related to the ongoing turmoil in the Middle East.  While “Troubles in The Middle East” is almost a cliché headline there are a couple of reasons to believe that the U.S. may get involved. 

First, as mentioned in the Guide, the use of chemical weapons against dissidents by the Syrian government may force our hand.  Second, Egypt is a critical nation in the region, boasting a population of 86 million, and from a very critical business perspective, home of the Suez Canal.

The defense stock CPI Aerostructures, Inc. (NYSE – CVU - $11.40) appears to be an outstanding play here as an up and comer with nice momentum.  CVU is up nearly 40% since the middle of April.

First, the Company’s products and services are right in line with the probable course of action the U.S. will take, an air strike.  CPI Aerostructures produces structural aircraft parts for defense contractors, including the USAF (United States Air Force) and also operates as a subcontractor to major aircraft manufacturers on the commercial level.  The Company makes modular and structural assemblies, skin panels, leading edges, flight control surfaces, engine components, wings, wing spars, cowl doors, and nacelle and inlet assemblies for military customers.

On the valuation side, CVU appears to be undervalued based on future EPS estimates.  The 2013 EPS Street consensus is forecast at $0.86 with and 2014 estimates at $1.25, placing the forward P/E around 9.  On the technical, side the short term DMA is very bullish at both the 5 and 20 day range.

CVU is a great way to possibly take a short-term profit on a geopolitical long-term problem.

Have a great day.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours. Goldman Small Cap esearch is not affiliate in any way with Goldman Sachs & Co.

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