Perry's Pick: Defense!

05/12/2006 12:00 am EST

Focus:

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry is the trading expert at the ChangeWave family of newsletters. His Tactical Trader is a sophisticated service for those comfortable with short-term positions as well as options plays. Here, he looks at a defense stock that also serves as a geopolitical hedge.

“After such a solid run for a number of stocks, I'm expecting many of the market leaders to do some backing-and-filling. That said, we should see decent rotation into the sectors that are poised to trade higher on that rotation as well as draw interest if the situation in Iran deteriorates precipitously. If that scenario does take shape then we want to own energy, defense systems, and put options. Indeed, a solid defense company would be a nice fit right about now, as a geopolitical hedge.

"Such is the basis for our recent stock of the week pick, DRS Technologies (DRS NYSE). DRS supplies integrated products and services to military forces, intelligence agencies, and prime contractors worldwide. It operates in three segments: Command, Control, Communications, Computers, and Intelligence (C4I); Surveillance and Reconnaissance (SR); and Sustainment Systems and Services (S3). 

"These guys are in just about every leading-edge segment of the today's sophisticated military systems. We're talking ship communications, naval displays, radar systems, battle management tactical computer systems, electro-optical sighting, targeting and weapon sensor systems, digital data and imaging systems, night vision, combat identification, threat emitters, unmanned vehicles, and simulation systems. And that's just for openers.

“The story on DRS Technologies that makes it a buy right now is how well they have integrated their purchase of Engineered Support Systems that was completed on February 1 of this year. The synergy of the two companies is remarkably strong, with cost savings that are expected to help boost growth by a forecasted 73% for 2007 over 2006. Looking at the one-year chart of DRS, we can see the stock breaking out of a nine-month basing formation back in late February at the $53 level.

 

“Following the technical breakout, the shares hit a high of $59.50 a week ago and have since consolidated to its current price of $56.20 per share. The stock is also sitting right on its 20-day moving average, finding good support. I'm looking for a pretty healthy run-up for the stock in the next few weeks.

"Based on the momentum of their acquisition of EASI, earnings, and the strong chart, I think shares of DRS will trade up to my price target of $65 for a projected gain of 16%. For those traders familiar, we recommend buying the DRS Sept 50 Calls at market. The current price per option is $8.50 and our price target is $15, for a potential gain of 75%."

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