Defense!

05/02/2003 12:00 am EST

Focus:

Richard Rhodes

Founder, Rhodes Capital Management

Surprisingly, there's no arguing that defense stocks have not significantly benefited from recent geopolitical events. Neverthless, many leading advisors remain convinced that defense will attract investor attention. Here, Richard Rhodes, Stephen Leeb, and income expert Richard Lehmann all offer defense plays.

Richard Rhodes, editor of The Rhodes Report, is bullish on two defense issues: He explains, "Boeing (BA NYSE) is a dilemma. The longer-term trend is lower. On the other hand, price action suggests a potential consolidation is forming. This is positive. Bullishly, a confirmed falling wedge occurred with the break above the declining trendline and the 50-day moving average. A close above the $28.50 would be favorable to long positions. Meanwhile, General Dynamics (GD NYSE) shows a positive pattrn. We find the emerging technical pattern has the nascent beginnings of a bottom, a series of higher lows and higher highs. Patience is required to sit through a correction that should find support between $59-$60. The stock should then breakout from this double bottom area, a supportive signal to higher prices."

Adds Stephen Leeb, editor of Personal Finance, "CACI International (CAI NASDAQ) is a way to invest in technology-related defense. The stock looks like a pure tech play at first blush, but t has close ties to the Pentagon and its been winning contract after contract. Revenues are income are rising sarply and its day as a market star is coming. Another play is growth portfolio holding Northrop Grumman (NOC NYSE). Northrop is perhaps the bets established defense company on he planet. Buy it for long term nuts-and-bolts safety and get in now as it revs up its information technology programs."

Richard Lehmann, editor of the Forbes/Lehmann Income Securities Investor adds, "In these nervous days, investors may want to consider  bonds are preferreds that are convertible into common stock.  They offer good yields, since the underlying stocks are depressed. In other words, you are compensated while you are waiting for the stock to come back. The convertible preferreds of two defense contractors capture my attention.  The Northrop Grumman 7.25% preferred yields 7.47% and converts into common in November, 2004. You get 1.13 common shares at that point; if the common stays where it is now (near $84) you will get shares worth $95.  The 8.25% Raytheon preferred yildls 8.78% and converts in May 2004 into 1.49 to 1.82 common shares; if the common stays put, it's now near $25, you will get 1.82 shares worth $46. These are mandatory convertibles.  In effect you are buying common at a small premium and recovering that premium individends.  You're getting the common cheaply; both companies' shares are near their 52-week  lows. The U.S. military budget is set to surge in coming years and that ertainly will benefit defense suppliers. But the market is leery about the firm's declining pension plan income; we feel the problem is temporary."

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