De-fense! De-fense!

Good Morning.  When most portfolio managers talk about being ‘defensive’ they are referring to buying gold or some other commodity to temper the affect inflation on your stock investments.  In our case today, we are talking about playing defense within the confines of small cap stocks that have exposure to the U.S. Defense Department.

Tensions are high and troops in Asia are on alert with yesterday’s news emanating from North Korea that its Army had received ‘authorization’ to attack the U.S..  Before you go into hysterics, realize that this dialogue has been fairly consistent from both Kim Jong-Il and his son Kim Jong-Un in between shooting 38 under par and hanging out with America’s favorite weirdo, Dennis Rodman, respectively.  Add in the constant idiocy from Iran’s Ahmadinejad, and one could make a serious case for arguing the validity and existence of Napoleonic Complex.  But I digress…

In response, the defense sector has rallied.  For example, Northrop Grumman (NYSE – NOC) is up 9% in the last month and General Dynamics (NYSE – GD) up almost 6% in the since early February.  These stocks are obviously out of our typical market cap range, but we have uncovered a nice play in our space.

Innovative Solutions and Support, Inc. (NASDAQ – ISSC - $5.44) is a stock that first off, jumps out at us from a technical perspective with very bullish indicators for the short term in almost every form of analysis, and secondly has had solid momentum since the start of 2013, up over 50%. 

Innovative Solutions has a customer base comprised of the primarily US Department of Defense and commercial contractors, aircraft operators, aircraft modification centers, foreign militaries, various original equipment manufacturers, government agencies, defense contractors, commercial air transport carriers, and corporate/general aviation markets.  The company manufactures and markets flat panel displays for aircraft use, air data systems, altitude alert systems, and engine and fuel cockpit displays.  The company just celebrated its 25^th anniversary and continues to innovate in its existing product line and expand its service offerings.

We think the momentum continues and the stock reaches $6.00 sometime this quarter.

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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