Triple Play on Homeland Security

11/12/2004 12:00 am EST

Focus:

Homeland security remains a "hot" sector among the leading analysts. John BuckinghamDennis Slothower, and Bryan Perry each find a different company that is applying its own technology to security inspection and explosive detection. Here are their reviews.

(For more information on the advisors cited below, please click on their photos.)

Buckingham, John"With Osama bin Laden recently resurfacing, it seems timely to feature a Homeland Security stock as our Stock of the Month," says John Buckingham, editor ofThe Prudent Speculator , the top performing financial newsletter for the past 20 years. Here's his homeland security pick. "OSI Systems (OSIS NASDAQ) is a diversified global developer of medical monitoring and imaging products as well as optoelectronic devices. But the sexiest of its businesses (32% of first quarter revenue) is the design of systems used to inspect people, baggage, cargo, vehicles, and other objects for weapons, explosives, drugs, and other contraband. Its inspection systems utilize x-ray, gamma ray, pulsed fast neutron, thermal neutron, and computer-enhanced imaging technologies. With cargo inspections both in the US and abroad a significant growth opportunity, revenue for the security segment is likely to explode. While we think that momentum investors may soon discover this Homeland Security play, our recommendation is based on sound fundamentals. The balance sheet sports a current ratio of 2.7 to 1 and $1.50 or so in cash, and the price to sales ratio is below 1. We are buyers of OSIS up to $18.89."

Slothower, Dennis"Homeland security is fast becoming a growth industry as our war on terrorism escalates," says Dennis Slothower, editor of Stealth Stocks. "I especially like American Science and Engineering (ASEI NASDAQ), which specialize in detection technologies that can uncover dangerous and elusive threats such as explosives and nuclear and other weapons. Governments and corporations currently use ASEI's X-ray inspection systems worldwide to combat terrorism, drug and weapon smuggling and illegal immigration. Its signature technology is Z Backscatter, which has unparallel detection capabilities. It is able to 'see' dangerous threats where other detection systems cannot. They are fast becoming the number one choice when high levels of security are needed. Institutional investors are starting to give them a lot more coverage. Before they become a household name or are taken over by a major defense company, I want to bring ASEI to your attention. According to my numbers, this is a stock that should be selling in the high $60s to low $70s over the next three to five years. It is currently trading in the mid-to-high $30s, so ASEI has a large upside potential."

Perry, Bryan"One of the sectors that we are very bullish on is the homeland security industry," says Bryan Perry, editor of Tactical Trader. "The events of 9/11 effectively gave life to what was a low-profile industry, making pure plays in baggage X-ray, surveillance, bomb detection, and personnel identification the overnight rage. "We recommend RAE Systems (RAE NYSE). This is a small cap ($250 million or so) company manufacturing and marketing gas, gamma radiation, chemical, and photo-ionization detectors used to detect hazardous materials, including toxic chemicals and explosives. The company has partnered with Savi Technology and EJ Brooks on cargo monitoring systems. Savi supplies the world's largest wireless cargo monitoring network to the Defense Department. The stock has held up quite well in the face of the meltdown of small-cap tech companies this summer. We see it as a great play on rapid sales growth in the public and private sector components of the homeland security marketplace. From a technical standpoint, the one-year chart shows all the makings of powerful breakout. The shares broke out of a nine-month base when they traded above $7 in late October on huge volume, validating the technical breakout and opening the way for a move to $10 over the intermediate term."

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