AXXel Knutson Report on Defense Stocks

Axxel Knutson, CEO of TradingWeapon.com comments on the defense industry stocks and some of the lesser known players.

August, 2003 -- Here is what I babbled July 11th, 2002 about the market: " UPDATE July 11, 2002: This index is OVERSOLD. We may dislike it...but there is money to be made here we think and that overrides bias.

January 7th, 2003: "Our" bottom of July was tested again in October [you may recall that "sinking feeling" but nevertheless those are good bottoms unless one is referring to M. Monroe, of course.

Additionally, the consolidation of the advance in the fall further confirmed the lows and with 11 quarter point rate drops and one 50 point rate drop courtesy of Big Al and the "I am asleep at the switch boys at the Fed" [can you really believe that it took them 12 rate drops? Can you imagine just how sleepy this group really is? Of course you can.... I can.

And here is that index [the Nasdaq 100] we have loved to hate so much and with Nasdaq throwing in the towel, it is now A BRAND NEW index...if you throw out a third of the stocks and start over...just what kind of an "index" is this anyway? Very icky mathematics for sure...we will call this the "Index that will remain an index as long as the junk in the index keeps going up...then when the stocks in the index crash, we will simply replace all the stocks and start over thus giving the investing public renewed faith in our index [for awhile anyway]." I know it is a long name for an index, but we will simply call it the "icky index" for short and you will know what we mean.

It being the icky index that it is, retested with a vengeance in October of 2002 but we do have a bottom..."

UPDATE: AUGUST 22, 2003: The Nasdaq 100 which was under 800 in the last quarter of 2002 is now at 1300 or an increase of over 60% from the trough and about 50% from our buy signal of July 11th, 2002. Just who in July of 2002 suggested we were at a bottom? Well, who? Are we selling? No. That should tell you volumes about where we think the market is going.

Nasdaq 100 chart is courtesy of Clearstation.com

So let's pick a group...

Let's take a look at the Aerospace and Defense Stocks, shall we? Yes, we shall.

The leaders in the group have performed well and we see no particular end in sight for names like Boeing [BA-34.20], Northrop Grumman [NOC-97.16] General Dynamics [GD-84.05], Goodrich [GR-25.53], United Defense [UDI-28.47] and our favorite Lockheed Martin [LMT-50.59] are all buys.

But we have other, less well-known names that you should own as well and here they are:

Enpro Industries, Inc. [NPO-11.02] in engineered products and sealants appears a god bet for a move on the recent $13 high and a price objective based up0n its stable markets of the high teens. The recent move in June appears consolidated and we suggest accumulation in this period of dullness.

Aeroflex [ARXX-9.19] The Group's principal activities are to produce microelectronic and testing solutions. The products are used in the aerospace, defense, fiber optic, wireless and satellite communications markets. Microelectronic solutions accounted for 51% of fiscal 2002 revenues, Test solutions, 41% and Isolator products, 8%. Buy.

United Industrial Corp. [UIC-17.63 we like the military segment of UIC [there is a small 11% energy sector as well]. The Group's principal activity is in the provision of military electronics and aerospace systems and components under defense contracts. The Group operates under two segments, defense and energy systems. The defense products include unmanned aerial vehicles, training and simulation systems, automated aircraft test and maintenance equipment, and combat vehicles and ordnance systems. It has been an orderly progression through the low and mid teens and now it is some for some explosive movement perhaps into the 20's. Buy.

Transtechnology Corp. [TT-7.47] - again the right segment of the defense group. The products of the Group include performance-critical rescue hoists, cargo-hook systems, weapons-handling systems, cargo winches, tie-down equipment and tow-hook assemblies. Its products are sold primarily to military and civilian agencies and aerospace contractors. After spending a month or so at the current level, an attack on double digits appears likely and that test is also likely to be successful. Buy.

Todd Shipyards [TOD-15.42] The Group's principal activity is to operate shipyard. The operations include shipbuilding, ship overhaul, conversion and repair in the United States. This is a very think stock and care is necessary when buying or selling. The recent downdraft appears to be market-related and this suggests an appropriate point of entry for a possible attack on the 20's. Buy.

Hi-Shear Technology Corp [HSR-3.18] the products are power cartridges/initiators, mechanical devices, electronic products, laser initiation systems, emergency cutters and automotive air bag inflators. Earnings and revenues appear in a turnaround and the price of the stock suggests accumulation at current levels. Buy.

Allied Defense Group [ADG 19.10] this is basically an "ammo" company. Ammunition products accounted for 73% of 2002 revenues, security systems & services, 24%, environmental safety, 3% and software training. The recent strong move $7-$21 appears consolidated and we rate this as a "strong buy."

AXXel Knutson, TradingWeapon.com
Axxel@cantella.com 908-647-5750