New World Disorder: 2 Stocks Set to Gain From Fighting Terror
One of the surest ways to make money is to buy shares of companies that are tapped into powerful, virtually unstoppable trends. As we were sadly reminded this week, one such “megatrend” is the ceaseless struggle against terror.
Below, I highlight two security firms that are stalwarts in counter-terrorism, a vital service that came to the fore on Monday in the deadly St. Petersburg metro bombing.
As civilized human beings, we’re appalled by these barbaric events. But investors must take the world as they find it, not as they wish it to be. Regrettably, as bloody terror attacks continue to wrack countries everywhere, robust demand for counter-terrorism is assured no matter who occupies the Oval Office… or the Kremlin.
On Monday, a blast inside a train on the St. Petersburg subway in Russia claimed 14 lives and injured dozens. In a statement on Tuesday, Russian investigators said they believe a jihadist suicide bomber was behind the explosion in Russia’s second-largest city. The fact that Russian President Vladimir Putin was in town at the time probably served as a magnet for the extremist.
Two key beneficiaries of increased anti-terrorism activities are Serco Group (OTC: SECCF) and Smiths Group (OTC: SMGZY). Let’s look at why these little-known stocks are suitable for your growth portfolio.
With a market cap of $1.4 billion, UK-based Serco offers operational and administrative support to local authorities and agencies related to immigration, policing, border security, defense, transport, and welfare. The company’s clients extend throughout the United Kingdom, Europe, the Middle East, Australia, and New Zealand.
The outsourcing company operates border crossings; air traffic control facilities; detention centers and prisons; public transit systems; roadway traffic lights; military bases; and ballistic missile defense systems.
Serco’s competitors include Lockheed Martin (NYSE: LMT) and BAE Systems (OTC: BAESY), which are aerospace/defense giants that aren’t as strictly focused on these outsourcing functions as Serco. What’s more, Serco is a mid-cap stock with greater potential for outsized growth than its mega-cap competitors.
Britain’s surprise vote to exit the European Union also spells more long-term work for Serco, in areas such as immigration control. Last week, Prime Minister Theresa May officially notified the EU that her country would indeed leave the EU, dashing the hopes of some investors that perhaps 10 Downing Street would find a way to sidestep the results of the 2016 referendum vote in favor of Brexit.
Serco’s stock has tumbled lately because of ostensibly weak operating results, which is an opportunity to buy shares on the cheap. The company’s fiscal 2016 revenue from continuing operations slumped 5% on a year-over-year basis to about £3 billion.
Although Serco carved out a pre-tax profit in 2016 of £29.6 million from a loss of £69.4 million in 2015, underlying trading profit fell 14% to £82.1 million.
However, these declines largely stemmed from the cyclical vagaries of government disbursements, which over the short term can wax and wane. Here’s the key takeaway that skittish investors are forgetting: Serco’s order pipeline in 2016 soared 40% from 2015 levels, while the company boasted a bid pipeline for larger contracts of £8.4 billion, a year-over-year increase of 30%.
Accordingly, Serco’s management has kept its revenue guidance for 2017 intact at £3.1 billion, including its underlying trading profit target of between £65 million and £70 million.
The naked truth about scanners…
Our second “go-to” anti-terrorism company is Smiths Group, a UK-based manufacturing conglomerate that specializes in advanced body scanners that are increasingly deployed by airports, transportation hubs and other security-conscious facilities around the world.
With a market valuation of $8.1 billion, Smiths is another mid-cap with ample room for growth.
The company’s Smiths Detection division makes body scanners and equipment for the detection of weapons, explosives, chemical agents, bio-hazards, narcotics, and contraband. Smiths Detection represents roughly 20% of Group sales.
Threats to the flying public remain in the forefront of terrorism concerns. Frost & Sullivan reports that total global expenditures on airport security will exceed $45.4 billion by 2018, compared to only $19.1 billion in 2011. Demand for scanners will be especially acute in terror-troubled areas such as Russia, the Middle East and India.
Smiths Detection commands about one-third of the scanner market, making it the world leader. In addition to airports, the company also supplies scanners to hospitals, prisons and militaries around the world.
Smiths Detection is the leading maker of millimeter-wave, or “full body” scanners, which are increasingly seen by security officials as the most effective way to prevent terrorist infiltration at key checkpoints.
These scanners work by using low-level radio waves; two rotating antennae cover the passenger from head to foot with radio frequency energy. In about 40 seconds, the scan produces a negative-like image that depicts anything under a passenger’s clothing, including plastic, chemical explosives and non-metallic weapons not revealed by conventional security methods.
Smiths Detection recently unveiled a next-generation explosives scanner for baggage that uses 3D technology to detect not just metals but also ceramics, plastics and liquids.
The average analyst expectation is that Smiths Group will rack up earnings growth of 9.6% over the next five years on an annualized basis.
Got a comment or question? Drop me a line: firstname.lastname@example.org — John Persinos
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