Defense the Way to Go

Written by GSCR Staff   
Thursday, 11 September 2014 06:41

In Monday’s Guide we gave some nice football analogies including playing a solid defense with limits, stops, and options.

Today we will use the pun to highlight defense stocks in terms of national security. The date of President Obama’s speech with a focus on defeating ISIS should not be lost on anyone given that it was on the eve of a day we will all remember and never forget. It appears that once again we will try and fight the good fight.

 

In that light, national defense stocks should see accumulation in the short term. One that we feel is going to be a nice trade is actually an old Market Monitor and 30-30 pick. Way back in March 2013 we featured Kratos Defense & Security Solutions (NASDAQ – KTOS - $7.21) in the Monitor and then again in August 2013 in the 30-30. The stock has had some up and downs but is up over 41% since we first highlighted it. Another run appears to be on the horizon.

 

First, the growth earnings metrics make the KTOS attractive. The forward P/E of 10 on an estimated 4% growth rate in top line revenue from 2014 to 2015 is a nice start. Second, a five year PEG ratio of 1.56 is also a favorable metric. Finally, the technical analysis side, a put call ratio of 0.6 for the November 10 strike contracts is a bullish signal. Add these micro metrics to the overall macro picture and there is every reason to believe KTOS will make a run.

 

In looking at the big picture, it is apparent that the strategy for a new war against terror will involve products and services that Kratos sells and is developing. Among other things, the Company offers electronic warfare/attack and intelligence, reconnaissance, surveillance, satellite command and control, satellite communications support, signal monitoring, interference detection, and unmanned aerial systems and unmanned ground systems. Additionally, Kratos has had tremendous deal flow over the past several months that should continue. The Company has landed three big drone deals of $4.2M, $35M, and $38 million over the last three months. Additionally, its Electronic Products division received orders valued at $7.5 million for the production of Integrated Microwave Assemblies (IMA) for two critical U.S. Navy platforms in August.   Finally, Kratos’ RT Logic subsidiary was selected by Idaho National Laboratory (INL) to demonstrate a ground breaking Common Data Link (CDL) waveform intended for use on Small Unmanned Aircraft Systems (SUAS) in August also.

 

We think the accumulation phase for KTOS starts imminently and that the stock returns to the $8.50 level this year.

 

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.

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