Homeland Security

05/14/2004 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Security and surveillance continues to see rising demand- an unfortunate by-product of terrorism, global tensions, and the growing concerns for homeland security. Ian Wyatt offers a play on cargo inspection, while John Buckingham offers two picks in video security.

"OSI Systems (OSIS NASDAQ) designs security and inspection systems used to inspect people, baggage, cargo, vehicles and other objects for weapons, explosives, drugs, and other contraband," says Ian Wyatt, editor of Growth Report . "The company is enjoying significant strength throughout their portfolio of security, inspection, and medical monitoring products, as well as cargo inspection products, which consist of x-ray screening and detection devices. Revenue guidance for 2004 calls for revenues of $243 million, up 22% from previous guidance of $200 million. OSI called for revenues in 2005 at $392 million. If this were to materialize, then we are talking about a 61% increase in year over year revenues. The recent passage of the annual budget for the Department of Homeland Security should ensure that guidance is commensurate with real hard earnings numbers. We believe that OSI Systems is such a company, with the growth plan, the diversity in their product pipeline, solid strength in their management team, and the promise of a safer America."

"The recent run up in many video security stocks caused by momentum investors is hard to justify," cautions value Investor John Buckingham, editor of The Prudent Speculator. "However, we continue to like tiny Vicon Industries (VII NYSE). The company designs a wide range of video systems and system components used for security, surveillance, safety, and communication. Certainly, we understand that momentum investors are fickle and they could quickly lose interest in VII, even though the valuation is relatively inexpensive and the balance sheet is cash-rich. With tangible book value of more than $6 per share and a price to sales ratio of 0.76, we have decided to boost our fundamental goal price to $12. Meanwhile, for those seeking a video surveillance play that has yet to participate in this momentum-driven move into security stocks, long-time holding Cohu (COHU NASDAQ) might be of interest. Cohu sells semiconductor test handling solutions as well as closed circuit TV, metal detection, and microwave communications equipment. Even without considering the fascination that speculators could have with its video camera business, we like COHU as the main semiconductor business is poised for recovery and the stock trades for two times book value and the balance sheet is free of long-term debt while sporting over $5.00 per share in cash. Our purchase limit is now $16.50."

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